Deck 14: Monetary Policy and the Bank of Canada

Question 1

Vault cash is equal to $2 million,deposits by depository institutions at the Central Bank are $3 million,the monetary base is $10 million,and bank deposits are $25 million.Bank reserves are equal to

A)$2 million.
B)$3 million.
C)$5 million.
D)$10 million.

Answer 1

$5 million.

Question 2

Which one of the following statement is true?

A)The money supply created in a multiple expansion of loans and deposits are less than the monetary base.
B)The money supply created in a multiple expansion of loans and deposits are much larger than the monetary base.
C)The money supply created in a multiple expansion of loans and deposits are equal to the monetary base.
D)The money supply created in a multiple expansion of loans and deposits are equal to the total currency.

Answer 2

The money supply created in a multiple expansion of loans and deposits are much larger than the monetary base.

Question 3

Suppose the Bank of Canada wanted to increase the money supply without using open-market operations.It could try to get the public to ________ their currency-deposit ratio and ________ banks' reserve requirements,which would in turn change the banks' reserve-deposit ratio.

A)decrease;lower
B)decrease;raise
C)increase;lower
D)increase;raise

Answer 3

decrease;lower

Question 4

Assume that the currency-deposit ratio is 0.5 and the reserve-deposit ratio is 0.2.The Bank of Canada carries out open-market operations,purchasing $1,000,000 worth of bonds from banks.This action will increase the money supply by

A)$1,428,571.
B)$1,714,285.
C)$2,142,857.
D)$2,400,000.

Question 5

Assume that the currency-deposit ratio is 0.4.The Bank of Canada carries out open-market operations,purchasing $1,000,000 worth of bonds from banks.This action increased the money supply by $1,750,000.What is the reserve-deposit ratio?

A)0.2
B)0.3
C)0.4
D)0.45

Question 6

The monetary base is defined as

A)bank reserves plus currency in circulation.
B)bank reserves minus vault cash.
C)all deposits at the Bank of Canada.
D)deposits at the Bank of Canada plus vault cash.

Question 7

Fractional reserve banking is the system that

A)allows banks not to insure their deposits.
B)allows banks not to join the Canadian Payments Association.
C)limits banks' activities from crossing provincial lines.
D)allows banks to keep smaller reserves than their deposits.

Question 8

Money multiplier is

A)the number of dollars of money supply that can be created from each dollar of monetary base.
B)the number of dollars of monetary base that can be created from each dollar of currency held by public.
C)the ratio of number of dollars of money demand that can be created from each dollar of monetary base.
D)the number of dollars of money supply that can be created from each dollar of reserves.

Question 9

Assume that the reserve-deposit ratio is 0.2.The Bank of Canada carries out open-market operations,purchasing $1,000,000 worth of bonds from banks.This action increased the money supply by $2,600,000.What is the currency-deposit ratio?

A)0.2
B)0.3
C)0.4
D)0.5

Question 10

Suppose there was a banking crisis.The money supply would shrink by the greatest amount if the public ________ their currency-deposit ratio and the banks ________ their reserve-deposit ratio.

A)decreased;decreased
B)decreased;increased
C)increased;decreased
D)increased;increased

Question 11

The money supply is $10 million,currency held by the public is $2 million,and the reserve-deposit ratio is 0.2.Bank reserves are equal to

A)$1.6 million.
B)$2 million.
C)$4 million.
D)$8 million.

Question 12

If people hold more currency,other things remaining constant

A)the money multiplier will decrease.
B)the money multiplier will increase.
C)the money multiplier will remain unchanged.
D)the monetary base will decrease.

Question 13

Under the 100% reserve banking,banks

A)do not lend and pay negative interest rates.
B)do not lend and pay positive interest rates.
C)lend and pay positive interest rate.
D)lend and pay negative interest rate.

Question 14

The currency-deposit ratio is determined by

A)banks.
B)the public.
C)the Central Bank.
D)Parliament.

Question 15

Magog banks currently have 1 million dinars and a system of 100% reserve banking.The government passes a law allowing fractional reserve banking and a minimum reserve-deposit ratio of 10%.Assuming people hold no currency,after the full process of multiple expansion of loans and deposits had worked itself out,the nation's money supply would equal

A)1,000,000 dinars.
B)9,000,000 dinars.
C)10,000,000 dinars.
D)11,000,000 dinars.

Question 16

The monetary base is equal to

A)banks' reserves plus their holdings of Treasury securities.
B)banks' reserves plus Bank of Canada funds.
C)banks' reserves plus currency in circulation.
D)M2 minus M1.

Question 17

Currently,the currency-deposit ratio is 0.3 and the reserve-deposit ratio is 0.2.The Bank of Canada raises the reserve-deposit ratio to 0.25,as a response to a change in the public's currency-deposit ratio,to maintain the old money multiplier.What is the public's approximate new currency-deposit ratio?

A)0.22
B)0.25
C)0.33
D)0.35

Question 18

The money supply is $10 million,currency held by the public is $2 million,and the reserve-deposit ratio is 0.2.Deposits are equal to

A)$1.6 million.
B)$2 million.
C)$4 million.
D)$8 million.

Question 19

Suppose the Bank of Canada decides to increase the money supply by $10 billion.In Canada,the currency-deposit ratio is 0.1485,and the reserve-deposit ratio is 0.0079.How much should the Bank of Canada change the monetary base?

A)$1.4 billion
B)$14.85 billion
C)$10 billion
D)$14.85 million

Question 20

Assume that the currency-deposit ratio is 0.3 and the reserve-deposit ratio is 0.2.What is the money multiplier?

A)1.5
B)2.0
C)2.6
D)5.0

Question 21

The leadership of the Bank of Canada is provided by

A)the Board of Directors.
B)the department of finance.
C)the federal government.
D)the directors of the main private banks.

Question 22

The money supply is $6 million,currency held by the public is $2 million,and the reserve-deposit ratio is 0.1.The monetary base is equal to

A)$2 million.
B)$2.4 million.
C)$2.6 million.
D)$4 million.

Question 23

If the money multiplier is 10,the sale of $1 billion of securities by the Bank on the open market causes

A)a $10 billion decrease in the money supply.
B)a $1 billion decrease in the money supply.
C)a $1 billion increase in the money supply.
D)a $10 billion increase in the money supply.

Question 24

When was the Bank of Canada created?

A)1914
B)1934
C)1946
D)1990

Question 25

The Bank of Canada is

A)on the north shore of the Ottawa river.
B)a Toronto fast-food outlet.
C)a money laundering service.
D)the Central Bank of Canada.

Question 26

The Central Bank can increase the money supply by

A)increasing the currency-deposit ratio.
B)increasing the monetary base.
C)increasing reserve requirements.
D)increasing the discount rate.

Question 27

Suppose that in Mysore,the reserve-deposit ratio is res = 0.5 - 2i,where i is the nominal interest rate.The currency-deposit ratio is 0.2 and the monetary base equals 100.The real quantity of money demanded is given by the money demand function L(Y,i)= 0.5Y - 10i,where Y is real output.Currently,the real interest rate is 5% and the economy expects an inflation rate of 5%.The money multiplier equals

A)2.00.
B)2.40.
C)3.00.
D)4.00.

Question 28

Which of the following are included in the Bank of Canada's Board of Directors?

A)the governor,the senior deputy governor,the deputy minister of finance,and 12 private citizens
B)the governor,minister of finance,and 12 part-time CEOs of private firms
C)the governor,prime minister,and 12 part-time citizens
D)the governor,the senior deputy governor,and 12 member of parliament

Question 29

Suppose that in Mysore,the reserve-deposit ratio is res = 0.5 - 2i,where i is the nominal interest rate.The currency-deposit ratio is 0.2 and the monetary base equals 100.The real quantity of money demanded is given by the money demand function L(Y,i)= 0.5Y - 10i,where Y is real output.Currently,the real interest rate is 5% and the economy expects an inflation rate of 5%.The reserve-deposit ratio equals

A)0.1.
B)0.2.
C)0.3.
D)0.4.

Question 30

Which of the following is NOT listed in the assets of the Bank of Canada's balance sheet?

A)Treasury bills
B)Government of Canada's deposits
C)Other government securities
D)Foreign reserves

Question 31

Suppose that in Mysore,the reserve-deposit ratio is res = 0.5 - 2i,where i is the nominal interest rate.The currency-deposit ratio is 0.2 and the monetary base equals 100.The real quantity of money demanded is given by the money demand function L(Y,i)= 0.5Y - 10i,where Y is real output.Currently,the real interest rate is 5% and the economy expects an inflation rate of 5%.Assume that the price level P is equal to 1.The value of output Y that clears the asset market is

A)240.
B)460.
C)480.
D)482.

Question 32

Which of the following tasks does NOT represent the Bank of Canada's responsibility?

A)implementing monetary policy
B)serving as a lender of last resort
C)implementing fiscal policy
D)acting as fiscal agent for the federal government

Question 33

If the Bank of Canada increases the monetary base by $5 million and the money multiplier is 5,M1 will

A)rise by $25 million.
B)fall by $25 million.
C)rise by $1 million.
D)fall by $1 million.

Question 34

The Bank of Canada's largest liability is

A)notes in circulation at banks.
B)notes in circulation outside banks.
C)deposits at members of the CPA.
D)Treasury bills.

Question 35

Suppose that in Mysore,the reserve-deposit ratio is res = 0.5 - 2i,where i is the nominal interest rate.The current-deposit ratio is 0.2 and the monetary base equals 100.The real quantity of money demanded is given by the money demand function L(Y,i)= 0.5Y - 10i,where Y is real output.Currently,the real interest rate is 5% and the economy expects an inflation rate of 5%.The money supply equals

A)200.
B)240.
C)300.
D)400.

Question 36

The governor of the Bank of Canada

A)is elected by the government.
B)is appointed by the government.
C)is appointed by the senate.
D)is chosen by the Bank itself.

Question 37

The Bank of Canada's largest asset is

A)foreign currency deposits.
B)advances to members of the CPA.
C)notes in circulation.
D)Treasury bills.

Question 38

Vault cash is equal to $2 million,deposits by depository institutions at the Central Bank are $4 million,the monetary base is $10 million,and bank deposits are $25 million.The money multiplier is equal to

A)2.5.
B)3.0.
C)4.0.
D)5.0.

Question 39

Which of the following will increase the money supply?

A)open-market purchases
B)higher reserve requirements
C)less discount lending
D)tighter credit controls

Question 40

Suppose the Bank of Canada decides to reduce the interest rate.Which of the following actions will produce the desired outcome?

A)The Bank sells treasury bills in the open-market operations.
B)The Bank reduces the Bank rate.
C)The Bank buys treasury bills in the open-market operations.
D)The Bank increases the desired reserve ratio.

Question 41

Which of the following is NOT a policy instrument of the Bank?

A)open-market operations
B)overnight rates operating board
C)changes in reserve requirements
D)changes in the government deficit

Question 42

There is an election coming up.Conservatives are currently in government,and will be able to raise more money for the next election campaign if they keep inflation and unemployment low.Conservatives can persuade firms whether or not to raise prices;Liberals can persuade the Bank whether or not to increase the money supply.The amount of money raised by each party and the resulting inflation and unemployment rates are given below.If the Conservatives can move first,what will be the outcome of this game?

A)Outcome A
B)Outcome B
C)Outcome C
D)Outcome D

Question 43

Open-market operations directly and immediately affect

A)the monetary base.
B)banks' holdings of securities.
C)the Bank's holdings of foreign exchange.
D)the money multiplier.

Question 44

The Bank of Canada influences the movement of the Canadian dollar exchange rates through

A)open-market operations.
B)overnight rates.
C)intervention using the exchange fund account.
D)SPRAs.

Question 45

Which of the following statements would Milton Friedman disagree with?

A)Monetary policy has few short-run effects on the real economy.
B)In the long run,changes in the money supply primarily affect the price level.
C)In practice,there is little scope for using monetary policy actively to smooth out business cycles.
D)The Central Bank cannot be relied on to effectively smooth out business cycles.

Question 46

There is an election coming up.Liberals can persuade firms whether or not to raise prices;Conservatives can persuade the Bank whether or not to increase the money supply.The Liberals move first.The amount of money raised by each party and the resulting inflation and unemployment rates are given below.What will be the outcome of this game?

A)Outcome A
B)Outcome B
C)Outcome C
D)Outcome D

Question 47

Which of the following statements would Milton Friedman agree with concerning the conduct of monetary policy?

A)Information lags are short,enabling the Central Bank to respond quickly to changes in the economy.
B)There is little uncertainty over the effect of a change in the money supply on the economy.
C)There are long and variable lags between monetary policy actions and their economic results.
D)Wage and price adjustments are relatively slow,so changing the money supply will have a minimal impact on the real economy.

Question 48

The primary purpose of the lender of last resort is to

A)influence the nation's money supply.
B)prevent financial crises.
C)control banks' excess reserves.
D)influence the amount of loans that banks provide to the public.

Question 49

If a bank borrows from the Bank of Canada,the interest rate is called

A)the prime rate.
B)the bank rate.
C)the overnight rate.
D)the reserve availability rate.

Question 50

There is an election coming up.Conservatives are currently in government,and will be able to raise more money for the next federal election if they keep inflation and unemployment low.Conservatives can persuade firms whether or not to raise prices;Liberals can persuade the Bank whether or not to increase the money supply.The amount of money raised by each party and the resulting inflation and unemployment rates are given below.If the Liberals can move first,what will be the outcome of this game?

A)Outcome A
B)Outcome B
C)Outcome C
D)Outcome D

Question 51

The problem with the strategy of achieving credibility through reputation is that

A)reputations are rarely credible.
B)reputations lack any commitment.
C)serious costs may be incurred during the period in which reputation is established.
D)rules always have a lower cost than reputations in maintaining credibility.

Question 52

Suppose the Bank of Canada reduces the Bank rate.This will cause

A)the interest rate to fall,the exchange rate to depreciate,and lending by banks to increase.
B)the interest rate to fall,the exchange rate to appreciate,and lending by banks to increase.
C)the interest rate to rise,the exchange rate to appreciate,and lending by banks to decrease.
D)the interest rate to rise,the exchange rate to depreciate,and lending by banks to decrease.

Question 53

Monetarists suggest doing which of the following?

A)maintain a steady growth rate of the money supply
B)use fiscal policy to combat unemployment in the short run
C)use monetary policy to combat unemployment in the long run
D)use fiscal policy to combat inflation in the long run

Question 54

When Canadian banks borrow from one another,they must pay the

A)bank rate.
B)prime rate.
C)overnight rate.
D)Interbank Offer Rate.

Question 55

In Winterland,the monetary base is $20 billion,total desired bank reserves are $1 billion,and total bank deposits are $5 billion.What is the money supply in Winterland?

A)$5 billion
B)$20 billion
C)$50 billion
D)$100 billion

Question 56

Suppose the Bank of Canada's target for inflation is 2 percent.If deviation of output from full-employment output is 1 percent,and the rate of inflation over the previous four quarters is 4 percent,what overnight interest rate the Bank should choose if it follows the Taylor rule?

A)5.7 percent
B)4 percent
C)7.5 percent
D)3 percent

Question 57

The primary criticism by Keynesians of the credibility argument for rules is that

A)reputations are a less costly method of gaining credibility.
B)reputations are a less costly method of maintaining credibility.
C)the cost of losing flexibility over policy choices may exceed the cost of gaining credibility.
D)rules that reduce government influence over monetary policy could ultimately be harmful to the economy.

Question 58

Members of the Central Bank and Canadabank are both vying for promotions.Central Bank members receive promotions if they keep interest rates and unemployment low.Canadabank officers receive promotions if they make loans with few defaults.In case A,the Bank keeps money growth low,minimizing inflation,but hurting growth;and in Case B,they allow money growth,which reduces interest rates,but increases inflation in the long run.In case C,Canadabank officers make few loans,minimizing the variability of profits;and in case D,they make many loans,increasing the variability of profits.The possible outcomes and promotions are listed below:

Assume members of the Bank and Canadabank don't care whether other people receive promotions.If the Bank makes their policy move first,what action will each bank take?

A)(A,C)
B)(A,D)
C)(B,C)
D)(B,D)

Question 59

Mobin finds a $50 bill under his couch and deposits it in his bank account.How much can the money supply increase if the deposit ratio is 10 percent?

A)$500
B)$450
C)$50
D)$10

Question 60

Milton Friedman would eliminate the destabilizing effect of the Central Bank's monetary policy by

A)eliminating the Central Bank.
B)removing the Central Bank's political independence.
C)requiring that the Central Bank choose a monetary aggregate and increase it at a fixed percentage rate each year.
D)eliminating the Central Bank's right to carry out open-market operations.

Question 61

Which of the following is true (M = Money supply,cu = currency - deposit ratio,res = reserve - deposit ratio,BASE = monetary base)?

A)M = [(cu + 1)/(cu + res)] BASE
B)M = [(cu + res)/(cu + 1)] BASE
C)BASE = [(cu + 1)/(cu + res)] M
D)BASE = [cu/(cu + 1)] M

Question 62

The monetary base

A)is the liabilities of the Central Bank that are usable as money.
B)is also called high-power money.
C)is equal to the money supply in an all-currency economy.
D)All of the above.

Question 63

In Summerland,the reserve deposit ratio is 4% and the currency-deposit ratio is 10%.What is the money multiplier?

A)4.7
B)14
C)7.86
D)6

Question 64

The money supply is $12 million,currency held by the public is $2 million,and the reserve-deposit ratio is 0.2.
a.What is the quantity of bank deposits?
b.What is the quantity of bank reserves?
c.What is the quantity of the monetary base?
d.What is the money multiplier (give a number)?

Question 65

Suppose the Bank of Canada cares only about keeping the economy close to full-employment output.The Bank can target the real money supply (thus keeping the LM curve fixed)or it can target the real interest rate-changing the money supply and shifting the LM curve,however,is necessary to prevent a change in the real interest rate.
a.Which is the best policy if the main shocks to the economy are shocks to the IS curve? Explain why.
b.Which is the best policy if the main shocks to the economy are shocks to real money demand? Explain why.

Question 66

Suppose the Bank of Canada has just learned that some foreign economies are headed for recession,which will reduce Canadian exports.This is an economic shock that shifts the IS curve down.What would you do in response to the shock if you want to keep the economy at full-employment equilibrium under each of the following cases?
a.You use the classical (RBC)model.
b.You use the Keynesian (efficiency wage)model.
c.You use the extended classical model with misperceptions.
In each case,show the IS-LM-FE diagram associated with your answer.

Question 67

Consider an economy with a fractional reserve banking and no currency held by public.If the monetary base is $1,000,000 and the reserve-deposit ratio 0.1,the money supply is

A)$ 5,000,000
B)$100,000
C)$900,000
D)$10,000,000

Question 68

The open-market sale by the central bank

A)reduces the monetary base.
B)increases the money supply.
C)increases the monetary base.
D)increases the reserve-deposit ratio.

Question 69

Which of the following is true about the Bank of Canada?

A)The Bank of Canada is a private corporation established in 1938.
B)The Bank of Canada's governor is appointed by Parliament.
C)The Bank of Canada sets the Canadian interest rate.
D)The Bank of Canada seems to be an arm of the government but is,rather,an independent institution.

Question 70

Which of the following is true (M = Money supply,CU = currency held by public,DEP = bank deposits,BASE = monetary base,RES = monetary base held as reserves by banks)?

A)BASE = M + DEP
B)M + CU + BASE
C)BASE = CU + RES
D)DEP = BASE - DEP

Question 71

Which of the following is true (M = Money supply,CU = currency held by public,DEP = bank deposits,BASE = monetary base)?

A)BASE = M + DEP
B)M = CU + BASE
C)CU = BASE - M
D)M = CU + DEP

Question 72

In Winterland,currency outside banks is $65 billion,bank reserves are $25 billion,and deposits are $603 billion.What is the monetary base in Winterland?

A)$90 billion
B)$40 billion
C)$693 billion
D)$628 billion

Question 73

Describe,in general terms,the strategy of monetary-policy,explaining how monetary-policy tools are used to achieve the goals of monetary policy.What intermediate stages are important in going from tools to goals? What are the links between the different stages? How does the Bank of Canada use this strategy today?

Question 74

Suppose the reserve-deposit ratio is res = 0.5 - 2i,where i is the nominal interest rate.The currency-deposit ratio is 0.2 and the monetary base equals 100.The real quantity of money demanded is given by the more demand function L(Y,i)= 0.5Y - 10i,where Y is real output.Currently the real interest rate is 5% and the economy expects an inflation rate of 5%.Assume the price level P is equal to 1.
a.Calculate the money multiplier.
b.Calculate the reserve-deposit ratio.
c.Calculate the money supply.
d.Calculate the value of output Y that clears the asset market.

Question 75

In a fractional reserve banking,

A)the reserve-deposit ratio is 1.
B)the reserve-deposit ratio is greater than 1.
C)the reserve-deposit ratio is less than 1.
D)the reserve-deposit ratio is zero.

Question 76

A bank run happens when

A)depositors attempt to withdraw currency simultaneously.
B)banking system is a 100 percent reserve banking.
C)the Central Bank does not lend money to the banks.
D)banks offer a high interest rate.

Question 77

In an economy with a fractional system banking,cu=0.6,res=0.2,and M=1,000,000.What is the monetary base?

A)$10,000,000
B)$2,000,000
C)$5,000,000
D)$500,000

Question 78

The liabilities of the Central Bank that are usable as money are called

A)the demand deposits.
B)M2.
C)high-power money.
D)M1.

Question 79

If currency-deposit ratio 0.6 and money multiplier is 2,what is the reserve-deposit ratio?

A)3
B)1
C)2
D)1.2

Question 80

Consider an economy with a fractional reserve banking and no currency held by public.If the money supply is $50 billion and the reserve-deposit ratio 0.1,the monetary base is

A)$500 billion
B)$5 billion
C)$10 billion
D)$5 million