Deck 12: The Bank of Canada

Question 1

What is the most important objective of the Bank of Canada?

A)keeping the bank rate at between 1 percent and 3 percent
B)keeping the unemployment rate at between 1 percent and 3 percent
C)keeping the inflation rate at between 1 percent and 3 percent
D)keeping the growth rate of the economy at between 1 percent and 3 percent

Answer 1

keeping the inflation rate at between 1 percent and 3 percent

Question 2

If the Bank of Canada sells a government bond to an investment dealer,what is the effect on the money supply?

A)It will shrink only if the Bank of Canada takes no reserves as payment.
B)It will not change.
C)It will shrink.
D)It will increase.

Answer 2

It will shrink.

Question 3

When the Bank of Canada purchases government securities from a chartered bank,what is the impact on that bank?

A)It loses equity.
B)It automatically becomes poorer.
C)It receives reserves that can be used to make additional loans.
D)It loses its ability to make loans.

Answer 3

It receives reserves that can be used to make additional loans.

Question 4

Which of the following is NOT a function of the Bank of Canada?

A)being a lender of last resort
B)serving as a bank for the federal government
C)issuing currency
D)setting currency exchange rates

Question 5

What is the most important function of the Bank of Canada?

A)regulating the Canadian financial system
B)regulating the supply of money
C)raising or lowering taxes
D)increasing or reducing government spending

Question 6

What will the Bank of Canada do to expand the money supply?

A)It will order new Bank of Canada notes delivered to chartered banks.
B)It will sell government securities, thus increasing the velocity of circulation of the money supply.
C)It will purchase government securities, thus putting more reserves in the hands of banks.
D)It will raise the bank rate.

Question 7

Which of the following is NOT considered to be a function of the Bank of Canada?

A)acting as a lender of last resorts for the chartered banks
B)acting as a banker for the federal government
C)issuing paper currency
D)setting credit card interest rates

Question 8

During a recession,which action are private banks likely to take?

A)reduce interest rates, alleviating the recession
B)increase lending, alleviating the recession
C)reduce their excess reserves
D)reduce lending, intensifying the recession

Question 9

When you write your rent cheque on your credit union account and your landlord deposits it in her account at the Bank of Montreal,what will be the impact in the banking system?

A)Chartered bank reserves will rise.
B)Deposits at the Bank of Canada will fall.
C)Deposits at the Bank of Canada will rise.
D)M2 will increase and M2+ will fall.

Question 10

Which of the following is NOT a function of the Bank of Canada?

A)limiting the national debt
B)controlling inflation
C)buying and selling government bonds to control the size and growth rate of the money supply
D)managing the federal government's bank accounts

Question 11

Which of the following is NOT an objective of the Bank of Canada?

A)to regulate credit and currency
B)to control and protect the external value of the Canadian dollar
C)to mitigate fluctuations in the general level of economic activity
D)to maintain a balanced federal budget

Question 12

Which of the following statements about the monetary policies generated by the Bank of Canada is the most accurate?

A)They must be consistent with fiscal policies that are made in Parliament.
B)They are sometimes inconsistent with fiscal policies.
C)They must be ratified by Parliament.
D)They must be approved by the minister of finance.

Question 13

Which of the following best describes the role of the Bank of Canada as the lender of last resort?

A)It lends money to people in localities not served by chartered banks.
B)It keeps the money supply from drying up during economic panics.
C)It provides mortgage money for the poor.
D)It lends money to developing nations whose own central banks have failed.

Question 14

Which of the following actions by the Bank of Canada will cause the money supply to contract?

A)It purchases equities in major Canadian corporations.
B)It sells government securities.
C)It borrows from the government.
D)It gathers up worn and ripped currency.

Question 15

What does the Bank of Canada do when it wants to expand the money supply through open market operations?

A)It sells government securities to foreign investors.
B)It purchases government securities from the government.
C)It sells government securities to investment dealers.
D)It purchases government securities from investment dealers.

Question 16

What is the term for the Bank of Canada's purchases and sales of government securities?

A)small-dealer transactions
B)margin operations
C)intermediary transactions
D)open market operations

Question 17

Who is the Bank of Canada owned by?

A)the depositors
B)multiple shareholders
C)chartered banks
D)the federal government

Question 18

What is a major advantage of the fact that the Bank of Canada is largely independent?

A)Monetary policy is not subject to control by politicians.
B)Monetary policy cannot be changed once it has been completed.
C)Monetary policy is subject to regular ratification by parliamentary votes.
D)Monetary policy will always be coordinated with fiscal policy.

Question 19

What is most frequently used when the Bank of Canada is attempting to adjust the money supply?

A)taxation
B)open market operations
C)deposit switching
D)moral suasion

Question 20

If the Bank of Canada buys a bond from an investment dealer,what is the effect on the money supply?

A)There is no effect from this action.
B)The money supply will grow by smaller amounts than if the Bank of Canada bought from a bank.
C)The money supply will be the same as if the Bank of Canada had bought the bond from a bank.
D)The money supply will shrink.

Question 21

Which of the following statements about the velocity of money is the most accurate?

A)It is inversely related to the rate of interest.
B)It is the rate at which the Consumer Price Index rises.
C)It is established by the Bank of Canada and, if needed, is adjusted four times a year.
D)It is the average number of times that a dollar is used in purchasing goods and services.

Question 22

If chartered banks are increasing their borrowing from the Bank of Canada while the Bank of Canada is selling government securities,what impact will the borrowing of the chartered banks from the Bank of Canada tend to have?

A)It will tend to reinforce the contractionary open market operations policy.
B)It will tend to reinforce the expansionary open market operations policy.
C)It will tend to counteract the expansionary open market operations policy.
D)It will tend to counteract the contractionary open market operations policy.

Question 23

If the Bank of Canada lowers the bank rate,what will be the effect on the money supply?

A)It will tend to increase the money supply.
B)It will have no effect, since there has been no deposit to begin an expansion or contraction process.
C)It will decrease the amount of money available to the banking system.
D)It will tend to decrease the money supply.

Question 24

What effect would a combination of an open market purchase by the Bank of Canada and an increase in the bank rate have on the money supply?

A)It would leave the money supply unchanged.
B)It would have an indeterminate effect on the money supply.
C)It would increase the money supply.
D)It would decrease the money supply.

Question 25

What can the Bank of Canada do to increase the rate of growth of the money supply?

A)purchase stocks on the stock market
B)raise the bank rate
C)lower the bank rate
D)sell government securities on the open market

Question 26

What action by the Bank of Canada is likely to lead to a decrease in the money supply?

A)selling government securities in the open market
B)switching government accounts from the chartered banks back to the Bank of Canada
C)decreasing mortgage rates
D)lowering the bank rate

Question 27

What does the P in the equation of exchange represent?

A)marginal level of prices
B)marginal propensity to spend
C)average level of prices of final goods and services in the economy
D)profit earned in the economy

Question 28

What action will the Bank of Canada take if it wishes to expand the money supply?

A)sell government bonds
B)buy stocks
C)buy government bonds
D)sell stocks

Question 29

What does P x Q represent in the equation of exchange?

A)the dollar value of all final goods and services sold in a country in a given year
B)the price index times nominal GDP
C)real GDP
D)the dollar value of all goods and services sold in a country in a given year

Question 30

What is the equation of exchange?

A)the price level x the velocity of money = the money supply x the quantity of goods and services produced
B)the money supply x the velocity of money = the price level x the quantity of goods and services produced
C)government spending = taxes + the federal budget deficit
D)the reciprocal of the desired reserve ratio = the deposit expansion multiplier

Question 31

When the Bank of Canada buys a Canadian government bond,what impact does this have on the volume of loans issued by the banking system and investment?

A)The volume of loans issued by the banking system increases and investment will tend to decrease.
B)The volume of loans issued by the banking system increases and investment will tend to increase.
C)The volume of loans issued by the banking system decreases and investment will tend to increase.
D)The volume of loans issued by the banking system decreases and investment will tend to decrease.

Question 32

If the target for the overnight lending rate is 5 percent,what would be the respective bank rate?

A)4.75 percent
B)5 percent
C)5.25 percent
D)5.5 percent

Question 33

Suppose the Bank of Canada sells $10 000 worth of bonds on the open market and the bank's desired reserve ratio is 5 percent,what will be the ultimate effect on the money supply?

A)It will increase by $200 000.
B)It will decrease by $200 000.
C)It will decrease by $10 500.
D)It will increase by $10 500.

Question 34

How would the Bank of Canada use open market operations and the bank rate to increase the money supply?

A)It would sell bonds and increase the bank rate.
B)It would buy bonds and reduce the bank rate.
C)It would buy bonds and increase the bank rate.
D)It would sell bonds and reduce the bank rate.

Question 35

What would constitute contractionary monetary policy by the Bank of Canada?

A)open market purchases of government securities and a cut in the bank rate
B)an increase in tariffs on imported goods and a decrease in foreign aid
C)an increase in income tax rates, a cut in government spending, and an elimination of the investment tax credit
D)open market sales of government securities and an increase in the bank rate

Question 36

If your economics professor buys a government bond from you,what will the effect be to banking reserves and the money supply?

A)Banking reserves will not change and the money supply will not change.
B)Banking reserves will increase and the money supply will not change.
C)Banking reserves will not change and the money supply will increase.
D)Banking reserves will increase and the money supply will increase.

Question 37

If the Bank of Canada buys a government bond from a member of the public,what is the effect on the banking system and the money supply?

A)The banking system has less reserves, and the money supply tends to fall.
B)The banking system has less reserves, and the money supply tends to grow.
C)The banking system has more reserves, and the money supply tends to grow.
D)The banking system has more reserves, and the money supply tends to fall.

Question 38

What effect would a combination of an open market purchase by the Bank of Canada and a decrease in the bank rate have on the money supply?

A)It would increase the money supply.
B)It would decrease the money supply.
C)It would leave the money supply unchanged.
D)It would have an indeterminate effect on the money supply.

Question 39

What effect would a combination of an open market sale by the Bank of Canada and an increase in the bank rate have on the money supply?

A)It would increase the money supply.
B)It would decrease the money supply.
C)It would have an indeterminate effect on the money supply.
D)It would leave the money supply unchanged.

Question 40

If the Bank of Canada sells a government bond to a member of the public,what impact does this have on the banking system reserves and the money supply?

A)The banking system has fewer reserves, and the money supply tends to fall.
B)The banking system has more reserves, and the money supply tends to fall.
C)The banking system has fewer reserves, and the money supply tends to grow.
D)The banking system has more reserves, and the money supply tends to grow.

Question 41

According to the equation of exchange,what would result from a change in the money supply of 6.5 percent,holding velocity constant?

A)a 6.5 percent change in nominal GDP
B)a 6.5 percent change in aggregate supply
C)a 6.5 percent change in real GDP
D)a 6.5 percent change in velocity

Question 42

In the equation of exchange,when will velocity tend to rise?

A)when the price level falls, other things being equal
B)when the nominal GDP falls, other things being equal
C)when the money supply rises, other things being equal
D)when real GDP rises, other things being equal

Question 43

Which of the following countries has suffered from hyperinflation this century?

A)Zimbabwe
B)Hungary
C)Chile
D)Germany

Question 44

What is the impact on GDP if M is constant and V decreases?

A)real GDP increases
B)nominal GDP decreases
C)real GDP decreases
D)nominal GDP increases

Question 45

If the velocity of money increases from 5 percent and real GDP increases 3 percent,what will the Bank of Canada need to do keep prices the same?

A)They would have to decrease the money supply by 8 percent.
B)They would have to decrease the money supply by 2 percent.
C)They would have to increase the money supply by 2 percent.
D)They would have to increase the money supply by 8 percent.

Question 46

If the velocity of money increases from 10 to 11 and real GDP increases from $1 billion to $1.2,what will the Bank of Canada need to do keep prices the same?

A)They would have to increase the money supply by 10 percent.
B)They would have to decrease the money supply by 10 percent.
C)They would have to increase the money supply by 20 percent.
D)They would have to decrease the money supply by 20 percent.

Question 47

What is the impact on GDP if M increases and V remains constant?

A)real GDP decreases
B)nominal GDP decreases
C)real GDP increases
D)nominal GDP increases

Question 48

Which of the following would occur if the money supply (M)and the price level (P)were increasing at approximately the same rate?

A)Real GDP would be stable provided that velocity was stable.
B)Nominal GDP would be stable provided that velocity was stable.
C)The economy would be suffering from hyperinflation.
D)Real GDP would be increasing if velocity were falling.

Question 49

Which of the following best describes the velocity of money?

A)The velocity of money is not constant over time.
B)The velocity of money is the same for every country so the Bank of Canada does not have to calculate its value.
C)If individuals are hoarding their money, the velocity of money will be high.
D)Control over the velocity of money implies that the Bank of Canada has precise control over real GDP.

Question 50

If people expect increasing inflation,what change would you expect to see in the equation of exchange?

A)Velocity would be indeterminate.
B)Velocity would be expected to stay the same.
C)Velocity would be expected to increase.
D)Velocity would be expected to decrease.

Question 51

If the amount of money in circulation is $50 million and nominal GDP is $150 million,what is the velocity of money?

A)0.33
B)2
C)3
D)5

Question 52

If policies of the Bank of Canada cause the money supply to increase and velocity is held constant,what is the expected outcome?

A)P × Q would decrease, and the general price level would decrease if Q remained constant.
B)P × Q would increase, and the general price level would increase if Q remained constant.
C)P × Q would decrease, and the general price level would increase if Q increased.
D)P × Q would increase, and the general price level would increase if Q increased.

Question 53

If velocity is relatively stable and the central bank persistently increases the money supply faster than the rate of real output,what will result?

A)recession
B)unemployment
C)inflation
D)stagflation

Question 54

Under which of the following circumstances is an increase in the money supply and a decrease in real GDP at the same time consistent with the equation of exchange?

A)if the price level falls rapidly enough
B)if the price level remains constant
C)if velocity rises rapidly enough
D)if velocity falls rapidly enough

Question 55

What is the equation of velocity?

A)nominal GDP / real GDP
B)value of final goods and services produced / money supply
C)(P × Q) / (M × V)
D)real GDP / M

Question 56

What is the relationship between inflation and a situation where the velocity of money (V)and real output (Q)were increasing at approximately the same rate?

A)The expansion of money will lead to deflation.
B)It would be impossible for monetary authorities to control inflation.
C)Monetary acceleration would not lead to inflation.
D)Inflation would be closely related to the long-run rate of monetary expansion.

Question 57

The Bank of Canada was established in 1935 and is owned by the federal government.

Question 58

If nominal GDP is $1200 billion and M2 is $150 billion,what is velocity?

A)0.5
B)2
C)4
D)8

Question 59

Which of the following statements about velocity is the most accurate?

A)It is the speed at which tax cuts are spent.
B)It is the speed at which economic activity takes place.
C)It is the turnover rate of money, or the intensity with which money is used.
D)It is the speed at which the multiplier effect takes place.

Question 60

Under what circumstances can real GDP rise at the same time money supply falls?

A)if the price level remains constant
B)if the price level rises rapidly enough
C)if velocity falls rapidly enough
D)if velocity rises rapidly enough

Question 61

Name four of the five primary functions of the Bank of Canada.

Question 62

The governor of the Bank of Canada has considerable independence in the day-to-day operations of the Bank of Canada.

Question 63

If money supply increases,P will rise as long as V and Q remain constant.

Question 64

Countries with independent central banks tend to have lower inflation rates as well as lower economic growth rates.

Question 65

The equation of exchange is most useful when we try to assess the impact of change in the stock markets on the aggregate economy.

Question 66

Velocity represents the average number of times that a dollar is used in purchasing final goods and services in a one-year period.

Question 67

During the sixteenth century,Spanish conquistadors like Hernan Cortes overwhelmed the Aztecs and other indigenous peoples in America by pillaging their cities and taking their gold and silver.The gold and silver was sent back to Spain,causing its money supply to increase tenfold.Assuming V remained stable and Q increased slightly,what do you think happened to prices in Spain during this period?

Question 68

The Bank of Canada oversees the reserves of the chartered banks through the sale and purchase of government securities.

Question 69

Velocity using the M2 measure of money is lower than velocity using the M2+ measure of money.

Question 70

The interest rate that the Bank of Canada charges banks for borrowing funds is called the bank rate.

Question 71

In Canada,monetary policy is the responsibility of the Bank of Canada.

Question 72

Changing reserve requirements is the most important method the Bank of Canada uses to change the supply of money.

Question 73

What is the equation of exchange? What are the variables in it,and how do they relate to each other?

Question 74

The chief function of the Bank of Canada is to be the federal government's tax collection institution.

Question 75

Explain the difference between the Ministry of Finance and the Bank of Canada.

Question 76

Open market operations directly change the rate of interest at which banks can borrow reserves from the Bank of Canada.