Exam 15: A: Interest Rates and Monetary Policy

Explain how the two principal tools of monetary policy are used.

How is the overnight lending rate established? What role does the Bank of Canada play?

Identify the major items in the consolidated balance sheet of the Bank of Canada.

What is the difference between the Bank of Canada's purchases of securities from the chartered banking system and those from the public? Give an example.

What are the two instruments the Bank of Canada has for influencing the money supply? Which instrument is more important?

The total demand for money is equal to the transactions demand plus the asset demand for money.(a) Assume that each dollar held for transactions purposes is spent on the average five times per year to buy final goods and services.If nominal GDP is $1,000 billion (or $1 trillion), what is the transactions demand? (b) The table below shows the asset demand at certain rates of interest.Using your answer to part (a), complete the table to show the total demand for money at various rates of interest. (c) If the money supply is $260 billion, what will be the equilibrium rate of interest? (d) If the money supply rises, will the equilibrium rate of interest rise or fall? (e) If GDP rises, will the equilibrium rate of interest rise or fall?

Describe the relationship between bond prices and interest rates.

Trace the cause-effect chain that results from a tight money policy.

Discuss the relative effectiveness of monetary policy in dealing with demand-pull inflation or recession.

Trace the cause-effect chain that results from an easy money policy.

Explain the impact of each of the following upon chartered bank reserves: (a) the Bank of Canada sells government bonds in the open market to private buyers; (b) the chartered banks reduce their indebtedness to the Bank of Canada.

Explain how the net export effect strengthens the effects an easy money and a tight money policy.

Why is it important for the Bank of Canada to be an independent agency?

Describe and explain how expansionary monetary policy was used to repair the economy in the United States after the mortgage debt crisis.

What is the relationship between the overnight lending rate and the prime interest rate? Why doesn't the Bank of Canada target the prime interest rate?

How does an increase in nominal GDP affect the equilibrium rate of interest?

The Bank of Canada is the bankers' bank.Explain.

Suppose the economy is experiencing a recession and high unemployment.Describe the transmission mechanism through which monetary policy could address these problems?

What is inflation targeting and what are its advantages?

Use the graph below to answer the following questions.Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. (a) What is the transactions demand for money in this market? (b) What is the asset demand for money if the interest rate is 4%? (c) If the money market is in equilibrium at 6%, describe the change that must occur for the equilibrium rate to change to 4%.(d) If the money market is in equilibrium at 6% and the money supply has increased to Sm3, by how much has total demand for money changed?