Exam 12: Monetary Policy in the Short Run

Figure 12.4 Scenario: The above figures represent the economy of Mondolvia, where points A, B, C, and D in the first figure reflect the corresponding points in the second figure. The economy of Mondolvia is initially at equilibrium with real GDP equal to potential GDP. In April 2012, Mondolvia reached the peak of a rapid housing bubble that dramatically increased consumer wealth. The central bank of Mondolvia recognized this housing bubble peak existed in June, 2012 and implemented corrective policy in August 2012. The corrective policy actually changed output in the economy 12 months after it was implemented. In the meantime, the housing bubble burst in December 2012, returning the economy back to its initial, pre-bubble equilibrium level. -Refer to Figure 12.4.Since the housing bubble burst and the economy returned to its initial,pre-bubble level before the corrective policy changed output,the impact of the change in policy is best represented as a movement from

When the Bank of Canada makes an open market ________,the target short-term nominal interest rate will increase,which will ________ GDP.

Targeting the overnight rate allows the Bank of Canada some ability to control bank reserves and thus the money supply.Explain how each of the following tools allows the central to fine-tune its control of bank reserves. a. Conducting open market operations b. Changing the bank rate

With its goal of price stability,the Bank of Canada attempts to

When the Bank of Canada makes an open market purchase,long-term real interest rates will ________,which will ________ GDP.

To increase the money supply,the Bank of Canada could

The governor of the Bank of Canada is appointed every ________ years,while the maximum period between federal elections is ________ years.

Figure 12.3 -Refer to Figure 12.3.Suppose that after a negative supply shock,the economy is at point X in the IS-MP model and at point B on the Phillips curve.If the Bank of Canada has a goal of price stability,the economy would ________ in the IS-MP model and ________ on the Phillips curve.

To decrease bank reserves,the Bank of Canada can

Which of the following is not a reason that the central bank does not aim for zero inflation?

Figure 12.5       Panel (a)                                   Panel (b) -Refer to Figure 12.5.If exchange rates are floating,an expansionary monetary policy would best be represented by a movement from ________ in panel (a)and a corresponding movement from ________ in panel (b).

The most important policy tool used by the Bank of Canada is

By rescuing large,troubled institutions,as happened during the Great Recession with institutions like AIG and General Motors,policymakers attempted to achieve financial and economic stability in the short run,but their actions may encourage even riskier behaviour on the part of these large institutions in the future if these institutions believe that they,too,will be bailed out if they get in trouble.This risk faced by policymakers is known as

Which of the goals pursued by policymakers in an open economy is desirable because it reduces the uncertainty of conducting economic activity across borders?

Figure 12.2 -Refer to Figure 12.2.Suppose the economy is initially above potential GDP,and the actual inflation rate is greater than the expected inflation rate.If the Bank of Canada wants to achieve the goal of price stability,this would be represented by a

Figure 12.1 -Refer to Figure 12.1...Suppose the economy is initially at full employment with real GDP equal to potential GDP,and the expected inflation rate equal to the actual inflation rate.If the economy then experiences a negative demand shock,and the central bank responds to the results of the demand shock with an appropriate monetary policy,this would best be represented by a movement from

Why does the Bank of Canada attempt to achieve a low,stable rate of inflation rather than an inflation rate of 0%?

When attempting to decrease the overnight rate,the Bank of Canada can

When a bank receives a $50 million discount loan from the Bank of Canada,the bank's reserves

Briefly explain the primary goal of the Bank of Canada.