Deck 28: Monetary Policy in Canada

Question 1

In general,if a central bank chooses to target the interest rate in its implementation of monetary policy,then

A)it is more difficult to communicate this policy to the public than a change in money supply.
B)the central bank can more easily control the process of deposit creation by the commercial banks.
C)the money supply is determined by the Minister of Finance.
D)the implementation of policy is more straightforward because the central bank knows precisely the slope and position of the money demand curve.
E)it conducts the necessary open-market operations to accommodate the resulting change in money demand.

Answer 1

it conducts the necessary open-market operations to accommodate the resulting change in money demand.

Question 2

Suppose the Bank of Canada wants to reduce short-term market interest rates.To do so,the Bank will

A)reduce its target for the overnight rate.
B)decrease the commercial banks' reserves.
C)decrease the money supply directly.
D)adjust the rate paid on Treasury bills.
E)reduce the commercial banks' reserve requirements.

Answer 2

reduce its target for the overnight rate.

Question 3

In general,if a central bank chooses to target the money supply in its implementation of monetary policy,then

A)the interest rate is determined by monetary equilibrium,and cannot be precisely predicted because of possible shocks to money demand.
B)the interest rate can be more carefully controlled.
C)implementation of policy is more straightforward because money supply is more easily controlled than the interest rate.
D)the interest rate is determined by the Minister of Finance.
E)the implementation of policy is more straightforward because the central bank can control the process of deposit creation.

Answer 3

the interest rate is determined by monetary equilibrium,and cannot be precisely predicted because of possible shocks to money demand.

Question 4

The Bank of Canada chooses to influence interest rates directly rather than influencing the money supply directly because

A)the former method does not require knowledge of the position of the money demand curve.
B)the deposit creation mechanism in the banking system is outside the full control of the Bank of Canada.
C)it is easier to communicate policy actions to the public by setting the interest rate.
D)the former method does not require knowledge of the slope of the money demand curve.
E)all of the above.

Question 5

The diagrams below illustrate two alternative approaches to implementing monetary policy.The economy begins in monetary equilibrium with the interest rate equal to 2% and the money supply equal to . FIGURE 28-1 Refer to Figure 28-1.The Bank of Canada must be able to easily communicate its monetary policy actions to the public.Which approach is more amenable to this requirement,and why?

A)Part (ii)- targeting the money supply: because an announcement of a 1% decrease in the money supply is more easily understood than an increase in the interest rate.
B)Part (i)- targeting the interest rate: because the Bank of Canada can more easily instruct the commercial banks to raise their interest rates.
C)Part (ii)- targeting the money supply: because the public can more easily understand that a decrease in reserves in the banking system makes it more difficult to get a loan or mortgage.
D)Part (i)- targeting the interest rate: because changes in the interest rate are much more meaningful and understandable to the public than changes in the money supply.

Question 6

In practice,the Bank of Canada implements its monetary policy by

A)directly influencing the overnight interest rate.
B)directly influencing the excess reserves in the commercial banking system.
C)setting the money supply.
D)directly influencing the price level.
E)influencing the slope of the money demand curve.

Question 7

In practice,the Bank of Canada uses monetary policy to reduce undesirable fluctuations in real GDP by

A)controlling business investment expenditures directly.
B)controlling government spending.
C)influencing market interest rates through changes in its target for the overnight interest rate.
D)directly influencing the money supply which affects the interest rate and hence,consumption and investment.
E)targeting the money supply directly.

Question 8

The diagrams below illustrate two alternative approaches to implementing monetary policy.The economy begins in monetary equilibrium with the interest rate equal to 2% and the money supply equal to . FIGURE 28-1 Refer to Figure 28-1.If the Bank of Canada's goal is to increase the target interest rate from 2% to 3%,then the most effective approach is to

A)reduce the money supply to ,as shown in part (ii),and then let the interest rate adjust to 3%.
B)increase the money supply to ,as shown in part (ii),and then let the interest rate adjust to 3%.
C)allow the money supply to shift to by market forces,which will cause the interest rate to rise to 3%.
D)raise the interest rate to 3%,as shown in part (i),and then buy government securities in financial markets to accommodate the decline in the quantity of money demanded.
E)raise the interest rate to 3%,as shown in part (i),and then sell government securities in financial markets to accommodate the decline in the quantity of money demanded.

Question 9

The diagrams below illustrate two alternative approaches to implementing monetary policy.The economy begins in monetary equilibrium with the interest rate equal to 2% and the money supply equal to . FIGURE 28-1 Refer to Figure 28-1.If the Bank of Canada raises the target interest rate from 2% to 3%,it is pursuing a(n)________ monetary policy and the quantity of money demanded will ________.

A)contractionary; rise
B)contractionary; fall
C)expansionary; not change
D)expansionary; rise
E)expansionary; fall

Question 10

One reason the Bank of Canada does not try to influence the money supply directly is that

A)the Bank of Canada has many other policy tools with which it can influence aggregate demand.
B)the Bank of Canada does not have the mandate to change the money supply.
C)because the money demand curve is almost horizontal,changes in the money supply would have little or no effect on the interest rate.
D)because the investment demand curve is almost vertical,any change in the interest rate resulting from a change in money supply would have little or no effect on desired investment expenditure.
E)the slope of the money demand curve is not precisely known,and so the effect on the interest rate of a change in money supply is uncertain.

Question 11

Consider the implementation of monetary policy.One difficulty in attempting to stabilize the economy by controlling the money supply is that

A)firms may be sensitive to changes in the rate of interest.
B)the Bank of Canada can print more money.
C)the commercial banks may choose not to hold excess reserves.
D)the money demand function may be unstable.
E)the Canadian government requires long-term loans.

Question 12

The diagrams below illustrate two alternative approaches to implementing monetary policy.The economy begins in monetary equilibrium with the interest rate equal to 2% and the money supply equal to . FIGURE 28-1 Refer to Figure 28-1.One advantage of implementing monetary policy by targeting the interest rate as shown in part (i),rather than targeting the money supply as shown in part (ii),is that

A)it is easier to get political support for changes in interest rates than for changes in the money supply.
B)it is almost impossible to change the money supply without passing new legislation.
C)the overall change in interest rates,and the resulting effect on aggregate demand,is more certain.
D)changes in interest rates have a stronger impact on aggregate demand than do changes in the money supply.
E)the position and slope of the money demand curve are known with certainty.

Question 13

Suppose the Bank of Canada wants to raise short-term market interest rates.To do so,the Bank will

A)purchase government securities in the open market.
B)increase its target for the overnight rate.
C)increase the commercial banks' required reserves.
D)adjust the rate paid on Treasury bills.
E)lower the reserve requirement.

Question 14

Any central bank,including the Bank of Canada,can implement its monetary policy by directly influencing either ________ or ________,but not both.

A)money supply; money demand
B)aggregate supply; aggregate demand
C)the money supply; the interest rate
D)aggregate demand; the interest rate
E)the price level; the interest rate

Question 15

Suppose the Bank of Canada chooses to expand the M2 measure of money supply by exactly $10 million.The Bank could implement this expansion by

A)buying $10 million worth of government securities on the open market.
B)selling $10 million worth of government securities on the open market.
C)increasing reserves at the commercial banks by $10 million.
D)decreasing reserves at the commercial banks by $10 million.
E)None of the above would lead to an increase of M2 by $10 million.

Question 16

In practice,it is not possible for the Bank of Canada to control the money supply because

A)the resulting effects on the value of the Canadian dollar are difficult to predict.
B)it cannot control the process of deposit creation carried out by the commercial banks.
C)it cannot control the amount of cash reserves that are injected into or withdrawn from the banking system.
D)it does not have the legal power to do so.
E)None of the above-the Bank of Canada could control the money supply if it chose to do so.

Question 17

What is the "bank rate"?

A)The interest rate at which the Bank of Canada will lend funds to the Canadian government.
B)The interest rate at which the Bank of Canada will lend funds to commercial banks.
C)The interest rate that commercial banks charge their best customers.
D)The interest rate that the Bank of Canada pays on deposits from the commercial banks.
E)It is the same as a margin requirement.

Question 18

The diagrams below illustrate two alternative approaches to implementing monetary policy.The economy begins in monetary equilibrium with the interest rate equal to 2% and the money supply equal to . FIGURE 28-1 Refer to Figure 28-1.If the Bank of Canada raises the target interest rate to 3%,as shown in part (i),then it must accommodate the resulting ________ in quantity of money demanded by ________ in financial markets.

A)increase; selling government securities
B)decrease; selling government securities
C)increase; buying government securities
D)decrease; buying government securities

Question 19

Most central banks,including the Bank of Canada,implement monetary policy by

A)controlling the money supply directly.
B)influencing a short-term interest rate directly.
C)influencing investment demand directly.
D)influencing the demand for money directly.
E)controlling the process of deposit creation in the commercial banking system.

Question 20

Loans from the Bank of Canada are

A)made only to the Canadian federal government and to provincial governments.
B)made to commercial banks at the bank rate.
C)made to commercial banks at the prime rate and are short-term in nature.
D)made to large non-bank corporations.
E)the Bank's major policy instrument.

Question 21

Suppose the Bank of Canada lowers its target for the overnight interest rate and longer-term interest rates in the market fall as a result.When this occurs,the commercial banks respond to

A)an increase in the demand for loans by buying government securities from the Bank of Canada,against which they can extend new loans.
B)an increase in the demand for loans by selling government securities to the Bank of Canada in exchange for cash,with which they can extend new loans.
C)a decrease in the demand for loans by selling government securities to the Bank of Canada and calling in existing loans.
D)a decrease in the demand for loans by buying government securities from the Bank of Canada in exchange for cash,and calling in existing loans.
E)an increase in the demand for loans by borrowing cash from the Bank of Canada with which they can extend new loans.

Question 22

Suppose the actual overnight interest rate is 3.5%.If the Bank of Canada raises its target for the overnight interest rate to 4%,and longer-term interest rates in the market rise as a result,

A)the demand for loans from commercial banks falls,the commercial banks sell government securities to the Bank of Canada,and the money supply falls.
B)the demand for loans from commercial banks rises,the commercial banks buy government securities from the Bank of Canada,and the money supply falls.
C)the demand for loans from commercial banks rises,the commercial banks sell government securities to the Bank of Canada,and the money supply rises.
D)the demand for loans from commercial banks falls,the commercial banks buy government securities from the Bank of Canada,and the money supply falls.
E)the demand for loans from commercial banks rises the commercial banks buy government securities from the Bank of Canada,and the money supply rises.

Question 23

When the Bank of Canada enters the open market and buys or sells government securities,we refer to this as

A)monetary policy.
B)commercial lending.
C)changing the target reserve ratio.
D)setting the target ratio.
E)open-market operations.

Question 24

The Bank of Canada establishes a rate at which they will lend to commercial banks and a rate at which they will borrow from commercial banks.By doing so,

A)the Bank of Canada can ensure that the actual overnight interest rate will never fall below 2%.
B)the Bank of Canada can ensure that the commercial banks will not be earning excess profits.
C)the Bank of Canada can ensure that money demand remains at the level necessary for monetary equilibrium.
D)the Bank of Canada establishes a spread,into which all interest rates in the economy fall.
E)the Bank of Canada can ensure that the actual overnight interest rate will fall between these two interest rates.

Question 25

The interest rate that the Bank of Canada charges commercial banks for loans is called the

A)term interest rate.
B)prime rate.
C)overnight interest rate.
D)bank rate.
E)preferred lending rate.

Question 26

Suppose the Bank of Canada raises its target for the overnight interest rate and longer-term rates in the market rise as a result.Households' and firms' demand for loans from the commercial banks would ________.In order to accommodate this change,the commercial banks require ________.

A)rise; more government securities
B)fall; more cash reserves
C)rise; more currency
D)remain stable; no change to their reserves
E)fall; fewer cash reserves

Question 27

Suppose the Bank of Canada announces its target for the overnight interest rate at 2.75%.What is the Bank's target range for the overnight interest rate?

A)1.75 - 3.75%
B)2.25 - 3.25%
C)2.5 - 3.00%
D)2.7 - 2.8%
E)2.74 - 2.76%

Question 28

The amount of currency in circulation in the Canadian economy is described as being endogenous to the system.This description is appropriate because

A)the process of deposit creation by the commercial banks is determined by the Bank of Canada.
B)the commercial banks determine the currency in circulation in response to the Bank of Canada's changes to the money supply.
C)the Bank of Canada conducts its open-market operations in response to the changing demand for cash from the commercial banks.
D)the Bank of Canada targets the money supply directly.
E)the Bank of Canada targets the currency in circulation directly.

Question 29

Suppose the Bank of Canada lowers its target for the overnight interest rate and longer-term rates in the market fall as a result.Households' and firms' demand for new loans from the commercial banks would ________.In order to make the new loans,the commercial banks require more ________.

A)rise; government securities
B)fall; currency
C)rise; cash reserves
D)remain stable; excess reserves
E)fall; excess reserves

Question 30

Suppose the Bank of Canada wishes to expand the money supply directly.To do so,the Bank could

A)sell government securities on the open market.
B)sell some of its foreign currency assets.
C)reduce its deposits at commercial banks.
D)buy government securities on the open market.
E)change the price level.

Question 31

In Canada,what are "open-market operations"?

A)government actions aimed at creating competition within the banking industry
B)loans made by the Bank of Canada to the commercial banks
C)the enforcement of reserve requirements at the commercial banks
D)the buying and selling of foreign exchange by the Bank of Canada
E)the buying and selling of government securities by the Bank of Canada

Question 32

The interest rate that commercial banks charge each other for the shortest period of borrowing or lending is called the

A)term interest rate.
B)prime rate.
C)overnight interest rate.
D)bank rate.
E)preferred lending rate.

Question 33

The Bank of Canada's purchases and sales of government securities,when they occur,are referred to as

A)increases and decreases in government expenditure.
B)margin requirements.
C)open-market operations.
D)reserve requirements.
E)the setting of the bank rate.

Question 34

Suppose the actual overnight interest rate is 4%.If the Bank of Canada lowers its target for the overnight rate to 3.75%,the money supply will eventually

A)increase as a result of open-market operations.
B)increase as a result of an increase in excess reserves in the banking system.
C)decrease as a result of an increase in excess reserves in the banking system.
D)decrease as a result of open-market operations.
E)decrease as a result of a decrease in the demand for new loans.

Question 35

The Bank of Canada conducts its open-market operations directly in response to

A)changes in aggregate demand.
B)orders from Parliament.
C)its announced changes in the money supply.
D)changes in the price level.
E)the changing demand for cash reserves from the commercial banks.

Question 36

If the Bank of Canada wants to influence real economic variables in the short run,it uses

A)policy instruments such as the exchange rate and investment to influence the economy.
B)its only policy instrument-the overnight interest rate target-to influence aggregate demand.
C)policy variables such as the exchange rate and investment to influence aggregate demand.
D)policy variables such as open-market operations to influence aggregate demand.
E)policy variables such as the money supply to influence investment and aggregate supply.

Question 37

The term structure of interest rates refers to

A)the general observation that the yield on 30-year government bonds is less than the yield on 90-day Treasury bills.
B)the variance of the different interest rates available in the economy.
C)the composition of the market interest rate.
D)the variation of the market interest rate over the span of one year.
E)the pattern of interest rates that corresponds to the varying terms to maturity of government securities.

Question 38

How does the Bank of Canada communicate its target for the overnight interest rate to the public?

A)monthly announcements at fixed announcement dates (FADs)
B)in its quarterly publication,"Monetary Policy Report"
C)announcements made 8 times per year at pre-specified fixed announcement dates (FADs)
D)The target is communicated to the minister of finance for approval and then released to the public on a quarterly basis.
E)The target is communicated to the Prime Minister for approval and then released to the public at 8 pre-specified fixed announcement dates (FADs).

Question 39

Suppose the Bank of Canada's announced target for the overnight interest rate is 2.75%.Why should we expect commercial banks to borrow and lend overnight funds at a rate very close to this target?

A)Because the Bank of Canada Act requires that commercial banks borrow from each other at a rate no higher than 0.25% above the target rate.
B)Because commercial banks know that they can borrow from the Bank of Canada at 3.00%,and lend to the Bank at 2.50% so the rate they charge each other will stay within that range.
C)Because the Bank of Canada chooses its target rate based on the anticipated borrowing needs of the commercial banks.
D)Because it is not legal for commercial banks to transact between each other at any rate outside of the Bank of Canada's target range.
E)Because commercial banks face regulatory obstacles if they borrow from each other at any rate outside of the Bank of Canada's target range.

Question 40

Suppose the Bank of Canada announces its target for the overnight interest rate at 2.5%.In that case,the Bank of Canada is willing to lend to commercial banks at ________% and is willing to pay ________% on deposits it receives from commercial banks.

A)2.25; 2.5
B)2.5; 2.0
C)2.5; 2.5
D)2.75; 2.25
E)3.5; 1.5

Question 41

Suppose the Canadian economy had a recessionary gap.To increase the level of desired aggregate expenditure,the Bank of Canada could

A)raise the bank rate.
B)increase its spending.
C)increase the reserve requirements of the commercial banks.
D)sell securities in the open market.
E)reduce its target for the overnight interest rate.

Question 42

If we observe that short-term market interest rates have fallen,we can certainly conclude that the

A)Bank of Canada has implemented an expansionary monetary policy.
B)Bank of Canada has implemented a contractionary monetary policy.
C)Bank of Canada has abandoned its inflation target.
D)Government of Canada has reduced the money supply.
E)It is not possible to conclude any of the above.

Question 43

To remove an inflationary gap,the Bank of Canada would probably seek to

A)increase its target for the money supply.
B)decrease its target for the overnight interest rate.
C)increase its target for the overnight interest rate.
D)decrease the bank rate.
E)buy government securities through open-market operations.

Question 44

The best description of the cause-and-effect chain of an expansionary monetary policy is that it will

A)lower the interest rate,raise investment spending,and increase real GDP.
B)raise the interest rate,decrease investment spending,and increase real GDP.
C)raise the interest rate,increase investment spending,and increase real GDP.
D)lower the interest rate,increase investment spending,and reduce real GDP.
E)raise the interest rate,decrease investment spending,and decrease real GDP.

Question 45

If there were a large and persistent recessionary gap,an appropriate monetary policy could include

A)increasing the bank rate.
B)increasing the overnight lending rate.
C)decreasing reserves available to the commercial banks.
D)the Bank of Canada reducing its target for the overnight interest rate.
E)the Bank of Canada selling government securities to the public.

Question 46

Suppose the Bank of Canada reduces its target for the overnight interest rate by 0.50 percentage points.In this situation,the Bank will likely need to accommodate the eventual resulting change in the demand for money by

A)increasing the supply of money by buying government securities on the open market.
B)increasing the supply of money by selling government securities on the open market.
C)decreasing the supply of money by buying government securities on the open market.
D)decreasing the supply of money by selling government securities on the open market.
E)maintaining the current supply of money which will increase the effectiveness of the change in the overnight interest rate.

Question 47

The best description of the cause-and-effect chain of a contractionary monetary policy in the short run is that it will

A)lower the interest rate,increase investment spending,and increase real GDP.
B)raise the interest rate,decrease investment spending,and decrease real GDP.
C)lower the interest rate,lower investment spending,and decrease real GDP.
D)raise the interest rate,decrease investment spending,and increase real GDP.
E)raise the interest rate,increase investment spending,and decrease real GDP.

Question 48

If desired investment spending is relatively sensitive to changes in interest rates,then monetary policy could be very useful because it would

A)be very effective in reducing expenditure during inflationary periods and very effective in expanding expenditure during recessionary periods.
B)be very effective in reducing expenditure during inflationary periods and ineffective in expanding expenditure during recessionary periods.
C)be very ineffective in reducing expenditure during inflationary periods and very effective in expanding expenditure during recessionary periods.
D)be very ineffective in reducing expenditure during inflationary periods and very ineffective in expanding expenditure during recessionary periods.
E)be somewhat effective in reducing expenditure during inflationary periods and very ineffective in expanding expenditure during recessionary periods.

Question 49

An expansionary monetary policy would ________ and would eventually increase the money supply.

A)reduce short-term interest rates
B)involve selling foreign-currency reserves in the foreign-exchange market
C)involve selling government bonds on the open market
D)increase short-term interest rates
E)involve increasing the target for the overnight interest rate

Question 50

To remove a recessionary gap,the Bank of Canada would probably seek to

A)increase its target for the overnight interest rate.
B)increase the bank rate.
C)decrease its target for the overnight interest rate.
D)sell government securities through open-market operations.
E)decrease its target for the money supply.

Question 51

If we observe that the actual rate of CPI inflation has fallen,we can certainly conclude that the

A)Bank of Canada has implemented an expansionary monetary policy.
B)Bank of Canada has implemented a contractionary monetary policy.
C)Bank of Canada has abandoned its inflation target.
D)Government of Canada has reduced the money supply.
E)It is not possible to conclude any of the above.

Question 52

Changes in monetary aggregates such as M2 and M2+ can be a poor guide to the stance of monetary policy if

A)commercial bank reserves are rising.
B)interest rates are changing rapidly.
C)interest rates are constant.
D)money demand is changing in unpredictable ways.
E)money demand is constant.

Question 53

Which of the following would constitute an expansionary monetary policy by the Bank of Canada?

A)moral suasion to increase the commercial banks' target reserve ratio
B)moral suasion to reduce lending by commercial banks
C)an open-market sale of government securities
D)a reduction of the Bank's target for the overnight interest rate
E)None of the above would be expansionary.

Question 54

If we observe that the bank rate has fallen,we can conclude that the

A)Bank of Canada has implemented a contractionary monetary policy.
B)Bank of Canada has abandoned its inflation target.
C)Government of Canada has reduced the money supply.
D)Bank of Canada has implemented an expansionary monetary policy.
E)Bank of Canada has adjusted the rate it pays on Treasury bills.

Question 55

Suppose the Bank of Canada increases its target for the overnight interest rate by 0.25 percentage points.In this situation,the Bank will likely need to accommodate the resulting change in the demand for money by

A)increasing the supply of money by buying government securities on the open market.
B)increasing the supply of money by selling government securities on the open market.
C)decreasing the supply of money by buying government securities on the open market.
D)decreasing the supply of money by selling government securities on the open market.
E)maintaining the current supply of money which will increase the effectiveness of the change in the overnight interest rate.

Question 56

If we observe that the actual rate of CPI inflation has increased,we can certainly conclude that the

A)Bank of Canada has implemented an expansionary monetary policy.
B)Bank of Canada has implemented a contractionary monetary policy.
C)Bank of Canada has abandoned its inflation target.
D)Government of Canada has reduced the money supply.
E)It is not possible to conclude any of the above.

Question 57

If we observe a small decrease in the actual overnight interest rate over a several-day period,we can definitely conclude that the

A)Bank of Canada has implemented an expansionary monetary policy.
B)Bank of Canada has implemented a contractionary monetary policy.
C)Bank of Canada has abandoned its inflation target.
D)Government of Canada has reduced the money supply.
E)It is not possible to conclude any of the above.

Question 58

Suppose the Canadian economy had an inflationary gap.To decrease the level of aggregate desired investment,the Bank of Canada could

A)buy securities in the open market.
B)lower short-term interest rates.
C)reduce its spending.
D)raise its target for the overnight interest rate.
E)raise the price level.

Question 59

If we observe a small increase in the actual overnight interest rate over a several-day period,we can definitely conclude that the

A)Bank of Canada has implemented an expansionary monetary policy.
B)Bank of Canada has implemented a contractionary monetary policy.
C)Bank of Canada has abandoned its inflation target.
D)Government of Canada has reduced the money supply.
E)It is not possible to conclude any of the above.

Question 60

If we observe that the bank rate has increased,we can conclude that the

A)Bank of Canada has abandoned its inflation target.
B)Government of Canada has reduced the money supply.
C)Bank of Canada has adjusted the rate it pays on Treasury bills.
D)Bank of Canada has implemented an expansionary monetary policy.
E)Bank of Canada has implemented a contractionary monetary policy.

Question 61

Suppose the economy is experiencing an inflationary gap.Which of the following describes a likely policy response by the Bank of Canada?

A)a contractionary monetary policy which leads to a lower interest rate,reduced investment demand,and a shift to the left of the AD curve
B)an expansionary monetary policy which leads to an increase in investment demand,and a shift to the right of the AD curve
C)an expansionary monetary policy which leads to a decrease in investment demand,and a shift to the left of the AD curve
D)a contractionary monetary policy which leads to an increase in investment demand,and a shift to the right of the AD curve
E)a contractionary monetary policy which leads to a reduction in investment demand,and a shift to the left of the AD curve

Question 62

Because of the volatility of food and energy prices,the Bank of Canada pays more attention in the short run to changes in ________ than to changes in ________.

A)total CPI inflation; core inflation
B)total CPI inflation; inflation of the GDP deflator
C)inflation of the GDP deflator; total CPI inflation
D)core inflation; total CPI inflation
E)the nominal exchange rate; the real exchange rate

Question 63

Given its existing policy regime of "inflation targeting," the Bank of Canada would likely react to a large positive aggregate demand shock by

A)lowering the bank rate.
B)buying bonds from the open market.
C)increasing its target for the overnight interest rate.
D)decreasing its target for the overnight interest rate.
E)ignoring the shock and allowing the economy to adjust.

Question 64

Most central banks in the developed countries focus their attention on

A)the elimination of output gaps.
B)reducing unemployment.
C)the reduction and control of inflation.
D)alleviating the harmful effects of inflation.
E)the growth of potential output.

Question 65

Which of the following describes the cause of a sustained inflation?

A)the monetary transmission mechanism
B)an aggregate demand shock significant enough to cause a substantial rise in the price level
C)continual monetary expansion
D)an aggregate supply shock significant enough to cause a substantial rise in the price level
E)simultaneous AD and AS shocks

Question 66

When the Bank of Canada increases the interest rate we call this a contractionary monetary policy.Why?

A)The higher interest rate leads to an increase in the level of national saving.
B)The higher interest rate causes a contraction of money demand.
C)The higher interest rate causes the money demand curve to shift to the left.
D)The higher interest rate leads to a leftward shift of the aggregate demand curve.
E)The higher interest rate causes the money supply curve to shift to the right.

Question 67

The long-run target currently used by the Bank of Canada is to set

A)M2 = real GDP/M1.
B)a long-run target range for the overnight lending rate.
C)a long-run target range for the Canadian-U.S.exchange rate.
D)a long-run target range for the 5-year mortgage rate.
E)a long-run target range for the inflation rate.

Question 68

As of 2018,the Bank of Canada's policy objective is to maintain inflation at or near the target of

A)0%.
B)1%.
C)2%.
D)3%.
E)4%.

Question 69

Why is high and uncertain inflation damaging to the economy? Because in the presence of high and uncertain inflation,

A)the price system is no longer capable of effectively signalling changes in relative scarcity through changes in relative prices.
B)individuals who receive their incomes in fixed nominal terms are made worse off.
C)there can be unexpected reallocations of real income between workers and firms.
D)there can be unexpected reallocations of real income between borrowers and lenders.
E)All of the above.

Question 70

What is one problem with focusing on the CPI as the measure of inflation when conducting monetary policy?

A)Many elements in the CPI change for reasons unrelated to the state of the Canadian economy.
B)It is closely related to the value of M2.
C)Changes in monetary policy have little effect on the CPI,especially in the long run.
D)The CPI is too stable to accurately reflect the changes occurring in the Canadian economy.
E)The CPI distorts the value of commercial bank reserves.

Question 71

It is widely accepted by economists that monetary policy is the most important determinant of a country's

A)level of real GDP.
B)level of potential output.
C)aggregate supply curve.
D)long-run rate of inflation.
E)long-run rate of economic growth.

Question 72

How does the Bank of Canada set in motion the monetary transmission mechanism?

A)by altering its target for the overnight interest rate
B)by altering the price level
C)by influencing the demand for money directly
D)by influencing the exchange rate directly
E)by influencing aggregate supply directly

Question 73

The Bank of Canada initially implements a contractionary monetary policy by

A)directly decreasing the money supply.
B)raising its target for the overnight interest rate.
C)selling government securities on the open market.
D)buying government securities on the open market.
E)reducing its target for the overnight interest rate.

Question 74

Most central banks accept that,in the long run,monetary policy has an effect on

A)the level of aggregate demand.
B)the price level and the inflation rate only.
C)the level of investment demand.
D)all real economic variables.
E)real GDP and the price level.

Question 75

Consider the following statement about inflation targeting: A policy of inflation targeting acts as an automatic stabilizer in the economy,just like the automatic fiscal stabilizers.Choose the most appropriate response to this statement.The statement is

A)true,because an inflationary gap is met with a contractionary monetary policy.
B)true,because a recessionary gap is met with an expansionary monetary policy.
C)not true,because inflation targeting requires active policy decisions by the Bank of Canada,whereas automatic fiscal stabilizers need no policy implementation.
D)not true,because inflation targeting automatically maintains inflation within the target range,whereas fiscal stabilizers require government policy decisions.
E)true,because inflation targeting and fiscal stabilizers are essentially the same policy tool.

Question 76

High inflation is costly to firms and individuals.Of the following,who is most adversely affected by high inflation?

A)a homeowner with a 25-year fixed-rate mortgage
B)a student with student loans repayable in nominal terms at a fixed rate of interest
C)a student with student loans repayable on an indexed basis at a variable rate of interest
D)a senior whose retirement income is an indexed pension plan
E)a senior whose retirement income is fixed in dollar terms

Question 77

When the Bank of Canada reduces the interest rate we call this an expansionary monetary policy.Why?

A)The lower interest rate leads to an increase in the level of national saving.
B)The lower interest rate causes an expansion of money demand.
C)The lower interest rate leads to a rightward shift of the aggregate demand curve.
D)The lower interest rate causes the money demand curve to shift to the right.
E)The lower interest rate causes the money supply curve to shift to the left.

Question 78

The Bank of Canada initially implements an expansionary monetary policy by

A)directly increasing the money supply.
B)selling government securities on the open market.
C)buying government securities on the open market.
D)reducing its target for the overnight interest rate.
E)raising its target for the overnight interest rate.

Question 79

Many central banks have established formal targets for the rate of inflation because of the following fundamental observations about economic relationships: 1.There are high costs associated with inflation.
2.High inflation causes high unemployment.
3.Monetary policy is the cause of sustained inflation.

A)1 only
B)2 only
C)3 only
D)1 and 3 only
E)1,2,and 3

Question 80

Given its existing policy regime of "inflation targeting," the Bank of Canada would likely react to a large negative AD shock by

A)raising the bank rate.
B)selling bonds on the open market.
C)increasing its target for the overnight interest rate.
D)decreasing its target for the overnight interest rate.
E)ignoring the shock and allowing the economy to adjust.