Question 1

Describe the relationship between bond prices and interest rates.

Accepted Answer

There is an inverse relationship.An increase in the interest rate causes bonds that pay a fixed amount in perpetuity to drop in price.

Question 2

Why is it important for the Bank of Canada to be an independent agency?

Accepted Answer

Those who support the notion of an independent Bank of Canada argue that the Bank should be protected from political pressures so that it can focus on the control of the money supply and the needs of the economy.Otherwise, the Bank of Canada would often be under intense political pressure from the Government of Canada to expand the money supply to accommodate an expansionary fiscal policy.An independent Bank of Canada is more likely to maintain a stable currency and shield the economy from the intense inflationary pressure created by an overly expansionary fiscal policy.

Question 3

Identify the major items in the consolidated balance sheet of the Bank of Canada.

Accepted Answer

The Bank of Canada's balance sheet contains two major assets: (1) securities, which are Government of Canada bonds purchased by Bank of Canada; and, (2) advances to chartered banks.The balance sheet contains three major liabilities: (1) reserves of chartered banks held as deposits at Bank of Canada; (2) Government of Canada deposits; and (3) notes in circulation.

Question 4

Use the graph below to answer the following questions.Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money.   (a) What is the transactions demand for money in this market?
(b) What is the asset demand for money if the interest rate is 4%?
(c) If the money market is in equilibrium at 6%, describe the change that must occur for the equilibrium rate to change to 4%.(d) If the money market is in equilibrium at 6% and the money supply has increased to Sm3, by how much has total demand for money changed?

Accepted Answer

(a) Transactions demand is $125.
(b) Ass

Question 5

What are the two instruments the Bank of Canada has for influencing the money supply? Which instrument is more important?

Accepted Answer

The Bank of Canada has one main instrume

Question 6

How does an increase in the price level affect the equilibrium rate of interest?

Accepted Answer

An increase in the price level leads to

Question 7

What is meant by the Liquidity Trap? Provide an example.

Accepted Answer

The Bank of Canada cannot be certain of

Question 8

The Bank of Canada is the bankers' bank.Explain.

Accepted Answer

This means that the Bank of Canada perfo

Question 9

What is the goal of monetary policy?

Accepted Answer

The main goal of monetary poli

Question 10

Explain how the two principal tools of monetary policy are used.

Accepted Answer

The Bank of Canada uses two principal to

Question 11

Use the table below to answer the questions.   (a) If the transactions demand for money equals 10% of nominal GDP, nominal GDP is $600 billion, and the money supply is $360 billion, what is the equilibrium interest rate?
(b) If nominal GDP remains constant, and the money supply is increased from $360 to $460 billion, what will the equilibrium rate of interest be?

Accepted Answer

(a) Transactions demand will be $60 bill

Question 12

How is the overnight lending rate established? What role does the Bank of Canada play?

Accepted Answer

The overnight lending rate is establishe

Question 13

What are the two strengths that monetary policy has over fiscal policy?

Accepted Answer

Monetary policy is relatively speedy and

Question 14

The total demand for money is equal to the transactions demand plus the asset demand for money.(a) Assume that each dollar held for transactions purposes is spent on the average five times per year to buy final goods and services.If nominal GDP is $800 billion, what is the transactions demand?
(b) The table below shows the asset demand at certain rates of interest.Using your answer to part (a), complete the table to show the total demand for money at various rates of interest.   (c) If the money supply is $240 billion, what will be the equilibrium rate of interest?
(d) If the money supply rises, will the equilibrium rate of interest rise or fall?
(e) If GDP rises, will the equilibrium rate of interest rise or fall?

Accepted Answer

(a) Transactions demand for money is $16

Question 15

The total demand for money is equal to the transactions demand plus the asset demand for money.(a) Assume that each dollar held for transactions purposes is spent on the average five times per year to buy final goods and services.If nominal GDP is $1,000 billion (or $1 trillion), what is the transactions demand?
(b) The table below shows the asset demand at certain rates of interest.Using your answer to part (a), complete the table to show the total demand for money at various rates of interest.   (c) If the money supply is $260 billion, what will be the equilibrium rate of interest?
(d) If the money supply rises, will the equilibrium rate of interest rise or fall?
(e) If GDP rises, will the equilibrium rate of interest rise or fall?

Accepted Answer

(a) Transactions demand for money is $20

Question 16

Trace the cause-effect chain that results from a tight money policy.

Accepted Answer

A tight money policy will cause bank res

Question 17

What is the relationship between the overnight lending rate and the prime interest rate? Why doesn't the Bank of Canada target the prime interest rate?

Accepted Answer

The prime interest rate is the rate that

Question 18

What are the political and economic limitations upon (a) fiscal policy and (b) monetary policy?

Accepted Answer

Political limitations on fiscal policy a

Question 19

When does the use of monetary policy create conflicts between the goals of macroeconomic stability and balance of international trade?

Accepted Answer

A conflict between macroeconomic stabili

Question 20

What is the difference between the Bank of Canada's purchases of securities from the chartered banking system and those from the public? Give an example.

Accepted Answer

Assume that the chartered banks are "loa

Exam 15: Part A: Interest Rates and Monetary Policy

Describe the relationship between bond prices and interest rates.

Why is it important for the Bank of Canada to be an independent agency?

Identify the major items in the consolidated balance sheet of the Bank of Canada.

What are the two instruments the Bank of Canada has for influencing the money supply? Which instrument is more important?

How does an increase in the price level affect the equilibrium rate of interest?

What is meant by the Liquidity Trap? Provide an example.

The Bank of Canada is the bankers' bank.Explain.

What is the goal of monetary policy?

Explain how the two principal tools of monetary policy are used.

How is the overnight lending rate established? What role does the Bank of Canada play?

What are the two strengths that monetary policy has over fiscal policy?

Trace the cause-effect chain that results from a tight money policy.

What is the relationship between the overnight lending rate and the prime interest rate? Why doesn't the Bank of Canada target the prime interest rate?

What are the political and economic limitations upon (a) fiscal policy and (b) monetary policy?

When does the use of monetary policy create conflicts between the goals of macroeconomic stability and balance of international trade?

What is the difference between the Bank of Canada's purchases of securities from the chartered banking system and those from the public? Give an example.

Part A: Limits, Alternatives, and Choices

Part B: Limits, Alternatives, and Choices

Part A: The Market System and the Circular Flow

Part B: The Market System and the Circular Flow

Part A: Demand, Supply, and Market Equilibrium

Part B: Demand, Supply, and Market Equilibrium

Part A: Market Failures: Public Goods and Externalities

Part B: Market Failures: Public Goods and Externalities

Part A: Governments Role and Government Failure

Part B: Governments Role and Government Failure

Part A: An Introduction to Macroeconomics

Part B: An Introduction to Macroeconomics

Part A: Measuring the Economys Output

Part B: Measuring the Economys Output

Part A: Economic Growth

Part B: Economic Growth

Part A: Business Cycles, Unemployment, and Inflation

Part B: Business Cycles, Unemployment, and Inflation

Part A: Basic Macroeconomic Relationships

Part B: Basic Macroeconomic Relationships

Part A: The Aggregate Expenditures Model

Part B: The Aggregate Expenditures Model

Part A: Aggregate Demand and Aggregate Supply

Part B: Aggregate Demand and Aggregate Supply

Part A: Fiscal Policy, Deficits, Surpluses, and Debt

Part B: Fiscal Policy, Deficits, Surpluses, and Debt

Part A: Money, Banking, and Money Creation

Part B: Money, Banking, and Money Creation

Part B: Interest Rates and Monetary Policy

Part A: Long-Run Macroeconomic Adjustments

Part B: Long-Run Macroeconomic Adjustments

Part A: International Trade

Part B: International Trade

Part C: Financial Economics

Part A: The Balance of Payments and Exchange Rates

Part B: The Balance of Payments and Exchange Rates

The Economics of Developing Countries

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