Deck 10: Central Banking and Monetary Policy

Question 1

On the liability side of the Bank of Canada's balance sheet, the three main categories are:

A) advances to chartered banks, government securities and deposits.
B) treasury bills of Canada, government deposits and securities.
C) notes in circulation, government of deposits and chartered bank deposits.
D) chartered banks deposits, advances to chartered banks and notes in circulation.

Answer 1

notes in circulation, government of deposits and chartered bank deposits.

Question 2

The most important function of the Bank of Canada is to:

A) keep the money supply from changing.
B) issue paper currency.
C) clear cheques for the commercial banks.
D) supply a necessary monetary base.

Answer 2

supply a necessary monetary base.

Question 3

Which of the following statements is false?

A) A larger monetary base allows the banks to expand their lending.
B) The Bank of Canada provides a monetary base that is consistent with Bank of Canada's monetary
Policy objectives.
C) Recent credit crisis, which started in the Summer of 2007, created a significant decrease in the demand for cash in the banking sector.
D) The Bank of Canada has a responsibility to promote stability in financial market.

Answer 3

Recent credit crisis, which started in the Summer of 2007, created a significant decrease in the demand for cash in the banking sector.

Question 4

Which one of the following is not one of the functions performed by a central bank?

A) Holding the deposits of commercial banks.
B) Holding deposits and making loans to the country's large corporations.
C) serving as a lender of last resort to the banking system.
D) regulating the money supply.

Question 5

When the Bank of Canada provides advances to the chartered banks in Canada:

A) it engages in open market operations in order to regulate the money supply.
B) it provides high-powered money directly to the banking system.
C) it raises the bank rate.
D it lowers the desired reserve ratio so that it is easier for the Bank of Canada to borrow money from the . commercial banking system.

Question 6

The lender of last resort providing advances to banks temporarily short of reserves is a role undertaken by:

A) the commercial banks.
B) the financial markets.
C) credit card companies.
D) the central bank.

Question 7

The assets of the Bank of Canada are all of the following except:

A) advances to other banks.
B) government of Canada securities.
C) foreign currencies.
D) deposits from Federal Governments.

Question 8

A central bank is a financial institution:

A) which operates to make a profit for its shareholders.
B) which operates to primarily finance private and government expenditures.
C) which operates to manage the monetary base available to other financial institutions and the public.
D) which is owned by large insurance and investment companies.

Question 9

A five-dollar bill issued by the Bank of Canada is:

A) a liability of the Bank of Canada.
B) an asset of the Bank of Canada.
C) a liability of the Bank of Canada until it is spent.
D) your liability if you hold that note.

Question 10

The fundamental policy objective of the central bank is to assist the economy in achieving in all of the following except:

A) promote stability in the financial markets.
B) promote stability of Canadian dollar in the foreign exchange market.
C) promote stable price.
D) promote stable output.

Question 11

The operating techniques of monetary policy include all of the following except:

A) open market operations.
B) changing the bank rate.
C) lowering taxes.
D) changing the reserve requirements.

Question 12

All of the following, except one, are monetary policy operating techniques in Canada. Which is the exception?

A) Switching government deposits between the Bank of Canada and the commercial banks.
B) Changing the desired reserve ratio of the commercial banks.
C) Selling bonds in the open market.
D) Changing the overnight rate and the bank rate.

Question 13

Suppose a central bank lowers the required reserve ratio. The effect on the commercial banking system would be to:

A) lower the amount of currency in circulation, and lower the currency to deposit ratio.
B) cause a reduction in the money supply only if the banking system is fully loaned up.
C) stimulate the commercial banking system to increase the money supply.
D) lower the commercial banking system's excess reserves.

Question 14

A central bank can increase the money supply by:

A) buying securities.
B) selling securities.
C) raising the bank rate.
D) raising reserve requirements.

Question 15

If the Bank of Canada sells securities in the open market, then:

A) the monetary base and the money supply expand.
B) the monetary base and the money supply contract.
C) the high-powered money (H) will increase.
D) the total deposits in the banking system will increase.

Question 16

Which of the following statements is false?

A) The Bank of Canada will conduct open market purchase of bonds to provide additional monetary base to support additional demand for money.
B) Open market sale of bonds by the Bank of Canada increases the monetary base in Canada.
C) Open market purchase of bonds by the Bank of Canada increases the money supply in Canada.
D) Open market sale of bonds by the Bank of Canada decreases the lending by other banks.

Question 17

If a central bank wanted to increase high-powered money, then it might:

A) increase its sale of government bonds.
B) increase its purchase of government bonds in the open market.
C) encourage other banks to increase their reserve ratio.
D) increase its overnight rate and the bank rate.

Question 18

If a central bank wants to pursue an expansionary monetary policy, then it will:

A) conduct an open market purchase of bonds to expand the banking system's monetary base.
B) conduct an open market sale of bonds to expand the banking system's monetary base.
C) raise the currency ratio in an attempt to raise the money multiplier.
D) raise the bank rate that it charges banks to borrow.

Question 19

In times of financial and economic crisis, as in 2008 and 2009, we saw all of the following except:

A) open market purchases of bonds by the Bank of Canada.
B) "quantitative easing," using open market purchases of bonds to increase monetary base.
C) fixed interest rate.
D) increase monetary base through appropriate policies to offset liquidity-shortages.

Question 20

When economists and bankers speak of open market operations, they are referring to:

A) the purchase or sale of high grade corporate bonds and stocks by the Bank of Canada to the general public.
B) an attempt by the Bank of Canada to affect banks' reserves but not necessarily the money supply.
C) the loans made by the Bank of Canada to members of the Canadian Payments Association.
D) the sale or purchase of government securities by the Bank of Canada.

Question 21

Suppose that the Bank of Canada enters the open market and purchases $15 million of government bonds from the general public; this will:

A) cause the banking system's reserves to increase, the monetary base to increase, and the system's lending capacity to increase.
B) eventually cause a decrease in the price of bonds in the bond market.
C) cause bank reserves to decline, the monetary base to fall, and the banking system's lending capacity to decline.
D) limit the size of the money multiplier.

Question 22

Suppose that the Bank of Canada purchases $40 million of government securities on the open market. This open market operation will cause the money supply to:

A) contract by more than $40 million since there will be both primary and secondary effects.
B) contract by less than $40 million since there will be only primary effects.
C) expand by only $40 million since there will be no secondary effects.
D) expand by more than $40 million since there will be both primary and secondary effects.

Question 23

If the Bank of Canada purchases government bonds on the open market, then we would expect all of the following to occur except:

A) an increase in the bank rate.
B) an increase in the commercial banking system's excess reserves.
C) an increase in the volume of loans made by commercial banks.
D) an expansion of bank deposits by some multiple of the Bank of Canada's purchase.

Question 24

The bank rate is:

A) the amount banks can pay for deposits.
B) the rate at which the Bank of Canada lends cash reserves to commercial banks.
C) the reciprocal of the Treasury Bill rate.
D) none of the above.

Question 25

The bank rate is the rate of interest which:

A) consumers pay on private loans.
B) the Bank of Canada charges banks if they borrow.
C) banks charge each other for loans.
D) a bank's best customers pay when they borrow money.

Question 26

Suppose that the central bank wants to lower general interest rates. An appropriate policy for the central bank would be to:

A) raise the interest rate on certain government bonds.
B) reduce the bank rate.
C) reduce the level of excess reserves that banks hold.
D) increase the desired reserve ratio.

Question 27

If the central bank lowers reserve requirements, the immediate effect will be the following one:

A) Banks will have excess reserves.
B) Banks will be forced to increase borrowing from the central bank.
C) Banks will have insufficient reserves.
D) Banks will have zero excess reserves.

Question 28

The immediate effect of the open market purchase of bonds by the central bank will be:

A) higher excess reserves of banks.
B) lower excess reserves of banks.
C) higher bond-holdings with non-bank public.
D) lower actual reserves of banks.

Question 29

The effects of the open market purchase of bonds by the central bank will be all of the following except:

A) higher excess reserves of banks leading to more lending from banks.
B) higher monetary base.
C) lower bank-deposit-holdings of non-bank public.
D) lower money supply.

Question 30

A reduction in the bank rate makes borrowing by the commercial banks:

A) more expensive.
B) too difficult.
C) relatively unattractive.
D) less expensive.

Question 31

A central bank could alter the supply of money by:

A) changing the monetary base through open market operations.
B) changing the size of the money multiplier through reserve requirement changes.
C) changing the bank rate.
D) all the above.

Question 32

Which one of the following would not increase the reserves of a single commercial bank?

A) The commercial bank borrows from the central bank.
B) An individual deposits cash in the commercial bank.
C) The commercial bank purchases a government bond from the central bank.
D) The central bank purchases a government bond from the commercial bank.

Question 33

The immediate effect of central bank's open market operations is to change:

A) the monetary base.
B) the discount rate.
C) desired reserve ratios.
D) bank profits.

Question 34

Suppose that the central bank purchases securities from the general public. As a result:

A) the monetary base will increase and the nominal money stock will increase.
B) the interest rate will fall.
C) any shortage of liquidity in the economy will be offset.
D) all of the above.

Question 35

"Quantitative easing" refers to the following:

A) Open market sale of bonds by the Bank of Canada to increase the monetary base.
B) Open market purchase of bonds by the Bank of Canada to increase the monetary base.
C) Open market sale of bonds by the Bank of Canada to decrease monetary base.
D) Higher Bank of Canada rate.

Question 36

Other things remaining constant, the sale of securities on the open market by the Bank of Canada would eventually lead to:

A) an increase in the real interest rate.
B) an increase in the level of investment spending.
C) an increase in the nominal money stock.
D) an increase in the level of aggregate income.

Question 37

When the central bank sells securities:

A) interest rates rise.
B) interest rates fall.
C) the Treasury buys the securities.
D) no effect is felt in the money market.

Question 38

If the central bank raises the bank rate relative to market interest rates:

A) the money supply is likely to increase.
B) the money supply is likely to decrease.
C) the money supply is likely to remain unchanged.
D) the money multiplier is likely to increase.

Question 39

If the money supply function is vertical, any value of the money supply set by the central bank implies a specific value for ______.

A) potential output
B) the interest rate
C) government purchases
D) the budget deficit

Question 40

If the Bank of Canada sets the interest rate, the equilibrium quantity of money in circulation will be determined by:

A) the demand for money.
B) the nominal interest rate and the price level.
C) the nominal interest rate and the real income.
D) the commercial banks.

Question 41

If the Bank of Canada sets a target interest rate, it can:

A) independently set a target money supply.
B) only support a money supply that is consistent with the target nominal interest rate target.
C) simultaneously set any money supply target.
D) shift the money demand curve to the right.

Question 42

All of the following are the targets of monetary policy except:

A) control the foreign exchange rate.
B) control the money supply.
C) control the inflation rate.
D) control the budget deficit.

Question 43

Which of the following are possible monetary policy targets?

A) The exchange rate.
B) The inflation rate.
C) The money supply.
D) All of the above.

Question 44

If a central bank sets an inflation rate target:

A) it can also set an independent money supply target.
B) it can also set an independent exchange rate target.
C) it can also set an independent interest rate target.
D) it must adjust the money supply, exchange rate, and interest rate required by its inflation target.

Question 45

When a central bank changes it's target interest rate, any value of the interest rate chosen by the central bank implies a specific value for ______.

A) potential output
B) the money supply
C) government purchases
D) the budget deficit

Question 46

The three main monetary policy instruments used by the Bank of Canada are:

A) tax rate changes, the overnight rate, and government deposit shifting.
B) tax rate changes, changes in government expenditures, and the overnight rate.
C) the overnight rate, open-market operations, switching Government of Canada deposits.
D) changes in government expenditures, the overnight rate, and tax rate changes.

Question 47

Since 1993, what has been the Bank of Canada's target range for the rate of inflation?

A) 0 to 2 percent.
B) 0 to 4 percent.
C) 1 to 3 percent.
D) 4 to 10 percent.

Question 48

Which of the following statements is false?

A) The Bank of Canada operated with fixed exchange rate, where the Canadian dollar-price one US dollar was $1.075.
B) The Bank of Canada dropped the fixed exchange rate target in 1970.
C) In the 1970s and 1980s, the Bank of Canada maintained money supply targets based on M1B control targets.
D) In the 1990s, the Bank of Canada followed inflation targets.

Question 49

The Bank of Canada sets the:

A) overnight interest rate.
B) money supply.
C) government purchases.
D) exchange rate.

Question 50

A monetary growth rate target:

A) keeps investment demand on a specified path.
B) keeps the real money demand on a specified path.
C) keeps nominal money stock on a specified path.
D) keeps the wage expectations on a specified path.

Question 51

A _____ monetary target shifts the money supply function to the _______.

A) lower, left
B) lower, right
C) higher, left
D) higher, middle

Question 52

Monetary growth targets were gradually _________ by many central banks because money demand was
_____________ .

A) introduced, falling
B) abandoned, predictable
C) introduced, unpredictable
D) abandoned, unpredictable

Question 53

All of the following are costs of high inflation except one, which is:

A) inflation erodes the value of money.
B) inflation discourages speculative investments.
C) inflation discourages productive investments.
D) inflation leads to a vicious circle of rising inflation due to rising wages and interest rates.

Question 54

All of the following are the costs of high inflation except one, which is:

A) inflation erodes the value of money.
B) inflation discourages speculative investments.
C) inflation discourages productive investments.
D) inflation leads to a vicious circle of rising inflation due to rising wages and interest rates.

Question 55

A monetary growth target involves the _____________ adjusting interest rates to maintain the quantity of money demanded in line with the given ______ for money supply.

A) commercial banks, forecast
B) central bank, forecast
C) central bank, target
D) commercial banks, target

Question 56

All of the following are the benefits of high inflation except one, which is:

A) since money is not losing its purchasing power, consumers and producers feel safe to make long-range plans.
B) sustained low inflation does not stimulate productive investment.
C) interests, both in real and nominal terms, are lower, encouraging investments to improve productivity.
D) the economy does not see a vicious circle of rising inflation due to rising wages and interest rates.

Question 57

If the central bank adjusts interest rates to maintain the demand for money in line with the given target for money supply, it is an example of:

A) a monetary target.
B) a spending target.
C) a balanced budget.
D) a tight money policy.

Question 58

To maintain the overnight loan rate when demand for monetary base temporarily increases, the Bank of Canada can:

A) use the tool of special purchase and resale agreement (SPRA).
B) increase the bank rate.
C) use the tool of sale and repurchase agreement (SRA).
D) sell government bonds to chartered banks.

Question 59

To maintain the overnight loan rate when the demand for monetary base temporarily declines, the Bank of Canada can:

A) use the tool of special purchase and resale agreement (SPRA).
B) increase the bank rate.
C) use the tool of sale and repurchase agreement (SRA).
D) buy government bonds from chartered banks.

Question 60

The overnight loans rate is:

A) higher than the bank rate.
B) lower than the bank rate.
C) always equal to the bank rate.
D) equal to the corporate loan interest rate minus the bank rate.

Question 61

Which of the following statements is true with regard to the overnight rates by the Bank of Canada?

A) The operating band is always plus one-quarter of one percentage point from the target overnight rate.
B) Lower target overnight rate leads to lower lending rate by other banks.
C) Lower overnight rates are used in the recent past to counter the effects of the recent financial crisis.
D) Banks respond to a rise in the overnight rate by raising their prime lending rate.

Question 62

Suppose that the Bank of Canada wants to reduce aggregate expenditure and shift the aggregate demand curve; it can do this by:

A) reducing the required reserve ratio.
B) increasing the overnight rate.
C) reducing the bank rate.
D) buying government bonds on the open market.

Question 63

When the Bank of Canada increases its target overnight rate, the commercial banks react by:

A) increasing their prime lending rate.
B) decreasing their prime lending rate.
C) keeping their prime lending rate unchanged.
D) borrowing more money from the Bank of Canada.

Question 64

If, at the end of the business day, a commercial bank is short of cash reserves, it will:

A) borrow cash in the overnight market.
B) increase its demand deposits.
C) impose notice requirements on future withdrawals.
D) all of the above.

Question 65

Zero settlement balance requirement by the chartered banks in Canada implies all of the following except one, which is:

A) if the chartered bank's deposit account with the Bank of Canada is overdrawn at the end of day's banking transactions, it must borrow to cover the overdraft, either from another bank of from the Bank of Canada.
B) falling short of the zero balance imposes a cost on a bank.
C) positive settlement balance by a bank has zero opportunity costs.
D) with a negative balance, the chartered bank can borrow from the Bank of Canada at the bank rate.

Question 66

The Bank of Canada's official interest rate policy instrument is the _______. This is the interest rate that prevails in the _______, and the rate at which commercial banks lend and borrow _______ funds from each other.

A) overnight rate target; overnight loans market; overnight
B) prime rate; money markets; short term
C) overnight rate target; money markets; long term
D) prime rate; overnight loans market; long term

Question 67

Under its current operating procedure, the Bank of Canada implements monetary policy by announcing a target for the ________ (the official interest rate), and then intervenes (if necessary) in the _______ in order to maintain this rate within a _______ percentage points operating band.

A) overnight market rate; overnight loan market; ± 0.50
B) prime rate; money markets; ± 0.25
C) overnight market rate; money markets; ± 0.25
D) overnight market rate; overnight loan market; ± 0.25

Question 68

If funds in the overnight loans market are trading above the overnight rate target, then the Bank of Canada will _______ to _______and ________the overnight market rate. Conversely, if overnight funds are trading below the overnight target rate, then the Bank will _______to _______ and _________the overnight interest rate.

A) make an SRA, reduce monetary base, raise; make an SPRA, increase monetary base, lower
B) make an SPRA, increase monetary base, lower; make an SRA, reduce monetary base, raise
C) sell bonds on the open market, reduce monetary base, lower; buy bonds on the open market, increase monetary base, raise
D) buy bonds on the open market, reduce monetary base, lower; sell bonds on the open market, increase monetary base, raise

Question 69

When the Bank of Canada wants to raise the real interest rate in Canada, it announces a ________
Overnight rate target (and the entire ± 0.25 percentage point operating band around the overnight rate target shifts ______). In response, the commercial banks ________ the market interest rates, particularly, the short term rates, by a similar amount.

A) higher; down; raise
B) lower; up; lower
C) higher; up; lower
D) higher; up; raise

Question 70

When the Bank of Canada wants to lower the real interest rate in Canada, it announces a ________
Overnight rate target (and the entire ± 0.25 percentage point operating band around the overnight rate target shifts ______). In response, the commercial banks ________ the market interest rates, particularly, the short term rates, by a similar amount.

A) higher; down; raise
B) lower; up; lower
C) lower; down; lower
D) higher; up; raise

Question 71

The Bank of Canada's overnight rate target corresponds closely to the:

A) bank rate.
B) federal funds rate in the U.S.
C) prime rate.
D) market rate.

Question 72

All of the following, except one, are examples of expansionary monetary policy. Which is the exception?

A) The Bank of Canada selling bonds.
B) The Bank of Canada switching government accounts from themselves to commercial banks.
C) The bank rate falling as a result of open market operations.
D) None of the above.

Question 73

Suppose the demand for monetary base were to decrease and the Bank of Canada wanted to keep the overnight interest rate unchanged. Which of the following would be the best policy to follow?

A) Switch government deposits into the commercial banks.
B) Make an SRA.
C) Make an SPRA.
D) Issue more currency.

Question 74

Suppose that the demand for money base increased and the Bank of Canada wanted to support its overnight interest rate setting. What would be a possible short run technique to achieve this?

A) Switching government deposits out of the commercial banks.
B) Buying bonds in the open market.
C) Lowering the bank rate.
D) None of the above.

Question 75

During the 1990s the main tool used by the Bank of Canada to manage the short-term cash position of the commercial banks was:

A) government deposit switching.
B) open market operations.
C) foreign exchange rate operations.
D) changing the bank rate.

Question 76

By transferring government deposits between accounts in the Bank of Canada and accounts in the commercial banks, the Bank of Canada:

A) provides the government with the funds needed to cover its expenditures.
B) provides cash for the non-bank public.
C) offsets the effects of government receipts and payments on the reserve position of the banks.
D) earns a fee for managing government finances.

Question 77

Interest rates are adjusted as part of monetary policy mainly to:

A) control inflation.
B) dampen house prices.
C) help manufacturing industry.
D) influence exchange rates.

Question 78

Based on a Taylor rule, which of the following would be appropriate if the economy was experiencing an inflationary gap?

A) An increase in the central bank's interest rate instrument.
B) A cut in the central bank's interest rate instrument.
C) An increase in the monetary base.
D) A shift in government deposit balances from the central bank to the commercial banks.

Question 79

Which of the following statements is false with regard to Taylor rule?

A) The central bank sets the interest rate at i_o, when the real output (Y) is equal to the potential output (Y_P).
B) The central bank increases the interest rate, when the real output (Y) is less than the potential output (Y_P).
C) The central bank decreases the interest rate, when the real output (Y) is less than the potential output (Y_P).
D)The central bank increases monetary base through open market purchases of securities, when the real output (Y) is less than the potential output (Y_P).

Question 80

If a central bank does not follow a Taylor rule, it will use one of the following options:

A) increase interest rate, if inflation and output are expected to be above their target levels.
B) keep interest rate unchanged, if inflation and output are expected to be above their target levels.
C) decrease interest rate, if inflation and output are expected to be below their target levels.
D) none of the above.