Question 1

The LVTS was put in place in order to eliminate the ________.

Accepted Answer

A)  systemic risk 
B)  principal-agent problem 
C)  moral hazard problem 
D)  credit risk 
A)  systemic risk 
B)  principal-agent problem 
C)  moral hazard problem 
D)  credit risk A

Question 2

What is the service provided by the LVTS? why is it important?

Accepted Answer

The LVTS is an electronic, real-time net settlement network, designed to provide immediate finality and settlement to time-critical transactions. There are fourteen LVTS participants and all other members of the Canadian Payments Association are able to arrange LVTS payments for their clients through the LVTS participants. The importance of the LVTS is that it eliminates systemic risk-the risk to the entire payments system due to the inability of one financial institution to fulfill its payment obligations in a timely fashion.

Question 3

The lower limit of the operating band for the overnight interest rate defines ________.

Accepted Answer

A)  the bank rate 
B)  the prime rate 
C)  the rate the Bank of Canada pays LVTS participants with positive settlement balances at the end of the banking day 
D)  the rate the Bank of Canada charges LVTS participants with negative settlement balances at the end of the banking day 
A)  the bank rate 
B)  the prime rate 
C)  the rate the Bank of Canada pays LVTS participants with positive settlement balances at the end of the banking day 
D)  the rate the Bank of Canada charges LVTS participants with negative settlement balances at the end of the banking day C

Question 4

If the Bank of Canada wants to relieve undesired upward pressure on the overnight interest rate it will enter into a ________.

Accepted Answer

A)  Special Purchase and Resale Agreement 
B)  Sale and Repurchase Agreement 
C)  Swap 
D)  Reverse Repo 
A)  Special Purchase and Resale Agreement 
B)  Sale and Repurchase Agreement 
C)  Swap 
D)  Reverse Repo

Question 5

If the Bank of Canada wants to alleviate undesired downward pressure on the overnight financing rate it will enter into a ________.

Accepted Answer

A)  Special Purchase and Resale Agreement 
B)  Sale and Repurchase Agreement 
C)  Swap 
D)  Repo 
A)  Special Purchase and Resale Agreement 
B)  Sale and Repurchase Agreement 
C)  Swap 
D)  Repo

Question 6

The Bank of Canada uses the ________ as its operating instrument.

Accepted Answer

A)  nominal interest rate 
B)  real interest rate 
C)  open market operations 
D)  federal funds rate 
A)  nominal interest rate 
B)  real interest rate 
C)  open market operations 
D)  federal funds rate

Question 7

If the operating band for the overnight interest rate is from 3.5 to 4.0 percent, then ________.

Accepted Answer

A)  the rate on positive settlement balances at the Bank of Canada is 3.5 percent 
B)  the rate on positive settlement balances at the Bank of Canada is the lower limit of the operating band 
C)  the bank rate is the lower limit of the operating band 
D)  A and B only. 
A)  the rate on positive settlement balances at the Bank of Canada is 3.5 percent 
B)  the rate on positive settlement balances at the Bank of Canada is the lower limit of the operating band 
C)  the bank rate is the lower limit of the operating band 
D)  A and B only.

Question 8

The rate spread at the Bank of Canada for LVTS balances is ________.

Accepted Answer

A)  300 basis points 
B)  200 basis points 
C)  50 basis points 
D)  25 basis points 
A)  300 basis points 
B)  200 basis points 
C)  50 basis points 
D)  25 basis points

Question 9

When the Bank of Canada lowers the operating band for the overnight interest rate, it ________.

Accepted Answer

A)  lowers the bank rate by the same amount 
B)  encourages LVTS participants to borrow reserves either from each other or from the Bank of Canada 
C)  it reduces the monetary base and ultimately the money supply 
D)  A and B only. 
A)  lowers the bank rate by the same amount 
B)  encourages LVTS participants to borrow reserves either from each other or from the Bank of Canada 
C)  it reduces the monetary base and ultimately the money supply 
D)  A and B only.

Question 10

The overnight interest rate is also known as the ________.

Accepted Answer

A)  the bank rate 
B)  the policy rate 
C)  reference rate 
D)  the growth rate of M2 
A)  the bank rate 
B)  the policy rate 
C)  reference rate 
D)  the growth rate of M2

Question 11

The overnight rate is ________.

Accepted Answer

A)  the interest rate on loans from the Bank of Canada 
B)  also know as the Bank rate 
C)  the rate banks give their best customers 
D)  the interest rate on loans of reserves from one bank to another 
A)  the interest rate on loans from the Bank of Canada 
B)  also know as the Bank rate 
C)  the rate banks give their best customers 
D)  the interest rate on loans of reserves from one bank to another

Question 12

Core CPI excludes ________.

Accepted Answer

A)  volatile components 
B)  headline items 
C)  indirect taxes 
D)  energy costs 
A)  volatile components 
B)  headline items 
C)  indirect taxes 
D)  energy costs

Question 13

If government deposits at the Bank of Canada are predicted to decrease, the Bank will offset the transaction through government deposit auctions to ________ settlement balances.

Accepted Answer

A)  decrease 
B)  increase 
C)  inject 
D)  resupply 
A)  decrease 
B)  increase 
C)  inject 
D)  resupply

Question 14

Standing facilities ________.

Accepted Answer

A)  refers to participant borrowing form each other to bring their settlement balances to zero at the end of the banking day 
B)  refers to the Bank of Canada refusal to lend to or borrow from a participant to bring their settlement balances to zero at the end of the banking day 
C)  refers to the Bank of Canada's building in Ottawa 
D)  refers to the Bank of Canada being ready to lend to or borrow from a participant to bring their settlement balances to zero at the end of the banking day 
A)  refers to participant borrowing form each other to bring their settlement balances to zero at the end of the banking day 
B)  refers to the Bank of Canada refusal to lend to or borrow from a participant to bring their settlement balances to zero at the end of the banking day 
C)  refers to the Bank of Canada's building in Ottawa 
D)  refers to the Bank of Canada being ready to lend to or borrow from a participant to bring their settlement balances to zero at the end of the banking day

Question 15

The operating band for the overnight interest rate is ________.

Accepted Answer

A)  50 basis points wide 
B)  defines the rate of interest the Bank of Canada charges LVTS participants with negative settlement balances at the end of the banking day 
C)  defines the rate of interest the Bank of Canada pays LVTS participants with negative settlement balances at the end of the banking day 
D)  A and B only. 
A)  50 basis points wide 
B)  defines the rate of interest the Bank of Canada charges LVTS participants with negative settlement balances at the end of the banking day 
C)  defines the rate of interest the Bank of Canada pays LVTS participants with negative settlement balances at the end of the banking day 
D)  A and B only.

Question 16

The Large Value Transfer System (LVTS) ________.

Accepted Answer

A)  is the core of the Canadian payments system 
B)  is an electronic net settlement network designed to provide settlement to wholesale transactions 
C)  is an electronic net settlement network designed to provide settlement to paper-based payment items 
D)  A and B only. 
A)  is the core of the Canadian payments system 
B)  is an electronic net settlement network designed to provide settlement to wholesale transactions 
C)  is an electronic net settlement network designed to provide settlement to paper-based payment items 
D)  A and B only.

Question 17

The Bank of Canada will engage in a sale and repurchase agreement when it wants to ________ reserves ________ in the banking system.

Accepted Answer

A)  increase; permanently 
B)  increase; temporarily 
C)  decrease; temporarily 
D)  decrease; permanently 
A)  increase; permanently 
B)  increase; temporarily 
C)  decrease; temporarily 
D)  decrease; permanently

Question 18

Although transactions in the LVTS account for less than ________ of the total number of transactions, they account for about ________ of the value of transactions.

Accepted Answer

A)  1 percent; 94 percent 
B)  5 percent; 90 percent 
C)  10 percent; 85 percent 
D)  20 percent; 80 percent 
A)  1 percent; 94 percent 
B)  5 percent; 90 percent 
C)  10 percent; 85 percent 
D)  20 percent; 80 percent

Question 19

If LVTS participating financial institutions have insufficient settlement balances ________.

Accepted Answer

A)  they can borrow from each other in the pre-settlement trading period at the bank rate 
B)  they can borrow from each other in the pre-settlement trading period at the overnight rate 
C)  they can borrow from the Bank of Canada 
D)  B and C only. 
A)  they can borrow from each other in the pre-settlement trading period at the bank rate 
B)  they can borrow from each other in the pre-settlement trading period at the overnight rate 
C)  they can borrow from the Bank of Canada 
D)  B and C only.

Question 20

The lending facility at the Federal Reserve sets a ________ on the short-term overnight interest rates.

Accepted Answer

A)  ceiling 
B)  floor 
C)  target 
D)  ceiling and floor 
A)  ceiling 
B)  floor 
C)  target 
D)  ceiling and floor

Exam 16: Tools of Monetary Policy

The LVTS was put in place in order to eliminate the ________.

What is the service provided by the LVTS? why is it important?

The lower limit of the operating band for the overnight interest rate defines ________.

If the Bank of Canada wants to relieve undesired upward pressure on the overnight interest rate it will enter into a ________.

If the Bank of Canada wants to alleviate undesired downward pressure on the overnight financing rate it will enter into a ________.

The Bank of Canada uses the ________ as its operating instrument.

If the operating band for the overnight interest rate is from 3.5 to 4.0 percent, then ________.

The rate spread at the Bank of Canada for LVTS balances is ________.

When the Bank of Canada lowers the operating band for the overnight interest rate, it ________.

The overnight interest rate is also known as the ________.

The overnight rate is ________.

Core CPI excludes ________.

If government deposits at the Bank of Canada are predicted to decrease, the Bank will offset the transaction through government deposit auctions to ________ settlement balances.

Standing facilities ________.

The operating band for the overnight interest rate is ________.

The Large Value Transfer System (LVTS) ________.

The Bank of Canada will engage in a sale and repurchase agreement when it wants to ________ reserves ________ in the banking system.

Although transactions in the LVTS account for less than ________ of the total number of transactions, they account for about ________ of the value of transactions.

If LVTS participating financial institutions have insufficient settlement balances ________.

The lending facility at the Federal Reserve sets a ________ on the short-term overnight interest rates.

Why Study Money, Banking, and Financial Markets

An Overview of the Financial System

What Is Money

The Meaning of Interest Rates

The Behaviour of Interest Rates

The Risk and Term Structure of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Financial Crises

Banking and the Management of Financial Institutions

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

The Money Supply Process

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory, Inflation, and the Demand for Money

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

Filters

The Bank of Canada will engage in a sale and repurchase agreement when it wants to reserves in the banking system.

Although transactions in the LVTS account for less than of the total number of transactions, they account for about of the value of transactions.