Exam 11: Monetary Policy

Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP is less than potential GDP, then the overnight interest target rate ________ the sum of the current inflation rate plus the equilibrium real overnight interest rate.

Assume you purchase an asset that cost 6000 and borrow 40 % of the cost from a wealthy relative. After a year the asset is worth 7800 . What is your rate of return on your investment?

What actions should the Bank of Canada take if it believes the economy is about to experience a high rate of inflation?

The Bank of Canada can use contractionary monetary policy in an attempt to keep inflation from increasing.

The Taylor Principle states a central bank should raise the nominal interest rate by ________ the increase in the inflation rate so that the real interest rate ________.

Figure 11.14 Alt text for Figure 11.14: In figure 11.14, a dynamic AD-AS model. Long description for Figure 11.14: The x-axis is labelled, real GDP (trillions of 2007 dollars).The y-axis is labelled, price level (CPI).6 lines are shown; SRAS1, SRAS2, AD1, AD2, LRAS1, and LRAS2.Line SRAS1 begins near the bottom left corner and slopes up to the top right corner.Line SRAS2 follows the same slope as line SRAS1, but is plotted to the right.Line AD1 begins at the top left corner and slopes down to the end of the x-axis.Line AD2 follows the same slope as line AD1, but is plotted to the right.Line LRAS1 is perpendicular to the x-axis and begins from x-axis value 1.7.Line LRAS2 is perpendicular to the x-axis and begins from x-axis value 1.9.Line LRAS1 intersects lines AD1 and SRAS1 at point A (1.7, 100).Lines AD2 and SRAS2 intersect at point B (1.94, 104).Points A and B are connected to their respective coordinates on the x-axis and y-axis with dotted lines.Line LRAS1 intersects line SRAS2 below point A.Line LRAS2 intersects lines SRAS1 and AD2 just above point B. -Refer to Figure 11.14.In the dynamic AD-AS model, if the economy is at point A in year 1 and is expected to go to point B in year 2, the Bank of Canada would most likely

Figure 11.18 Alt text for Figure 11.18: In figure 11.18, a graph comparing real GDP and price level. Long description for Figure 11.18: The x-axis is labelled, real GDP (trillions of 2007 dollars).The y-axis is labelled, price level (CPI, 2002 = 100).7 lines are shown; SRAS1, SRAS2, AD1, AD without policy, AD with policy, LRAS1, and LRAS2.Line SRAS1 begins near the bottom left corner and slopes up to the top right corner.Line SRAS2 follows the same slope as line SRAS1, but is plotted to the right.Line AD1 begins at the top left corner and slopes down toward the end of the x-axis.Lines AD without policy, and AD with policy, follow the same slope as line AD1, but are plotted to the right.Lines LRAS1 and LRAS2 are perpendicular to the x-axis such that line LRAS2 is to the right of line LRAS1.Line LRAS1 intersects lines AD1 and SRAS1 at point A.Lines AD without policy, and SRAS2 intersect at point B.Line LRAS2 intersects the lines AD with policy, and SRAS2 at point C. -Refer to Figure 11.18.In the figure above, suppose the economy in Year 1 is at point A and is expected in Year 2 to be at point B.Which of the following policies could the Bank of Canada use to move the economy to point C?

Which of the following explains why mortgages weren't considered securities in the United States prior to 1970?

If the Bank of Canada targets the money supply, and the money demand curve shifts to the left, then the Bank of Canada

Most economists believe that the best monetary policy target is

Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.

Suppose the equilibrium real overnight interest rate is 5 percent, the target rate of inflation is 3 percent, the current inflation rate is 5 percent, and real GDP is 4 percent above potential real GDP. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the overnight interest target rate equals

An increase in the interest rate

Table 11.3 -Refer to Table 11.3.Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2017 and in 2018 if the Bank of Canada does not use monetary policy.If the Bank of Canada wants to keep real GDP at its potential level in 2018, it should

Falling interest rates can

Suppose that the economy is producing above potential GDP and the Bank of Canada implements the correct change in monetary policy, but not until after the economy has passed the peak of the boom.Then

Given that it does not regulate financial institutions, how does the Bank of Canada promote stability of financial markets and institutions?

The Bank of Canada's two main monetary policy targets are

What is a mortgage? What were the important developments in the mortgage market during the years after 1970 in the United States?

A decrease in real GDP can