Exam 15: Part A: Interest Rates and Monetary Policy

Both the Bank of Canada and chartered banks buy and sell government securities, but for substantially different reasons.Explain.

What key target has become the recent focus of monetary policy?

Suppose the economy is experiencing inflation.Describe the transmission mechanism through which monetary policy could address this problem?

Describe and explain how expansionary monetary policy was used to repair the economy in the United States after the mortgage debt crisis.

Other things being equal, what effect will each of the following have on the equilibrium rate of interest? (a) an increase in the money supply; (b) an increase in nominal GDP; (c) a decrease in the money supply; (d) a leftward shift of the asset demand for money.

How do the lags associated with monetary policy differ from those associated with fiscal policy?

What are the five functions of the Bank of Canada? Which one is most important?

Explain what is meant by cyclical asymmetry with regard to monetary policy effects.

Following are the consolidated balance sheets of the chartered banks.Assume that the desired reserve ratio for banks is 10%.The figures in column 1 show the balance sheets' condition prior to each of the following five transactions.Place the new balance-sheet figures in the appropriate columns and complete A, B, C, D, and E for each column.Start each part (2-4) with the figures in column 1.All figures are in billions of dollars.

Explain the impact of each of the following upon chartered bank reserves: (a) the Bank of Canada sells government bonds in the open market to private buyers; (b) the chartered banks reduce their indebtedness to the Bank of Canada.

What is inflation targeting and what are its advantages?

Describe the links between monetary policy and the international economy due to the net export effect, and its impact on the trade deficit.

Trace the cause-effect chain that results from an easy money policy.

How does an increase in nominal GDP affect the equilibrium rate of interest?

What is the net export effect of a tight monetary policy? Explain.

Discuss the relative effectiveness of monetary policy in dealing with demand-pull inflation or recession.

Differentiate between expansionary and restrictive monetary policies.

Use the table below to answer the questions: (a) If the transactions demand for money equals 10% of nominal GDP, nominal GDP is $800 billion, and the money supply is $480 billion, what is the equilibrium interest rate? (b) If nominal GDP remains constant, and the money supply is decreased from $480 to $380 billion, what will the equilibrium rate of interest be?

Why is the transactions demand for money less than nominal GDP?

Suppose the economy is experiencing a recession and high unemployment.Describe the transmission mechanism through which monetary policy could address these problems?