Question 1

The objective of the Bank of Canada's monetary policy is

Accepted Answer

A) to keep the unemployment rate below 5 percent, the inflation rate between 1 and 3 percent a year, and long-term real GDP growth above 4 percent a year. 
B) to control the quantity of money and interest rates to avoid inflation and when possible prevent excessive swings in real GDP growth and unemployment. 
C) to keep the unemployment rate below 5 percent, the inflation rate between 1 and 3 percent a year, and long-term interest rates below 4 percent a year. 
D) to keep the labour force participation rate above 80 percent, the inflation rate below 2 percent a year, and the exchange rate fluctuating by less than 3 percent a year. 
E) to keep the overnight loans rate below 2 percent a year and the unemployment rate at its natural rate. 
A) to keep the unemployment rate below 5 percent, the inflation rate between 1 and 3 percent a year, and long-term real GDP growth above 4 percent a year. 
B) to control the quantity of money and interest rates to avoid inflation and when possible prevent excessive swings in real GDP growth and unemployment. 
C) to keep the unemployment rate below 5 percent, the inflation rate between 1 and 3 percent a year, and long-term interest rates below 4 percent a year. 
D) to keep the labour force participation rate above 80 percent, the inflation rate below 2 percent a year, and the exchange rate fluctuating by less than 3 percent a year. 
E) to keep the overnight loans rate below 2 percent a year and the unemployment rate at its natural rate.

Question 2

Suppose the inflation rate is 3 percent and the output gap is -1 percent. Using the Taylor rule, the Bank of Canada sets the overnight loans rate equal to

Accepted Answer

A) 5 percent. 
B) 6 percent. 
C) 4 percent. 
D) 1 percent. 
E) 5.5 percent. 
A) 5 percent. 
B) 6 percent. 
C) 4 percent. 
D) 1 percent. 
E) 5.5 percent.

Question 3

When the Bank of Canada fights inflation by implementing an open market operation, the supply of reserves curve shifts ________ and the supply of money curve shifts ________.

Accepted Answer

A) leftward; leftward 
B) leftward; rightward 
C) rightward; leftward 
D) rightward; rightward 
E) none of the above 
A) leftward; leftward 
B) leftward; rightward 
C) rightward; leftward 
D) rightward; rightward 
E) none of the above

Question 4

Choose the statement that is incorrect.

Accepted Answer

A) The actual path of the CPI was on trend from 1995 through 1998. 
B) Between 1999 and 2001, the CPI moved below the 2 percent trend line. 
C) The actual path of the CPI was below trend from 2001 through 2007. 
D) The Bank of Canada and the Government of Canada agree that the inflation-control target range will be 1 percent to 3 percent. 
E) After 2008, the CPI was below trend. 
A) The actual path of the CPI was on trend from 1995 through 1998. 
B) Between 1999 and 2001, the CPI moved below the 2 percent trend line. 
C) The actual path of the CPI was below trend from 2001 through 2007. 
D) The Bank of Canada and the Government of Canada agree that the inflation-control target range will be 1 percent to 3 percent. 
E) After 2008, the CPI was below trend.

Question 5

Why does the Bank of Canada pay close attention to the core inflation rate in addition to the overall CPI inflation rate?

Accepted Answer

A) The core rate is more volatile and therefore a better predictor of trend inflation. 
B) The core rate includes taxes, while the overall CPI rate does not. 
C) The core rate has a lower average value and therefore makes the Bank look better. 
D) The core rate is less volatile and a better predictor of future CPI inflation. 
E) The core rate excludes eight volatile prices and is therefore more likely to stay within the target band. 
A) The core rate is more volatile and therefore a better predictor of trend inflation. 
B) The core rate includes taxes, while the overall CPI rate does not. 
C) The core rate has a lower average value and therefore makes the Bank look better. 
D) The core rate is less volatile and a better predictor of future CPI inflation. 
E) The core rate excludes eight volatile prices and is therefore more likely to stay within the target band.

Question 6

Choose the statement that is incorrect.

Accepted Answer

A) The Bank of Canada's choice of monetary policy instrument is the overnight loans rate. 
B) Although the Bank of Canada can change the overnight rate by any reasonable amount that it chooses, it normally changes the overnight rate by a single point at a time. 
C) In recent years, the overnight loans rate has been at historically low levels. 
D) Since late 2000, the Bank has established eight fixed dates on which it announces its overnight loans rate target for the coming period of approximately six weeks. 
E) The Bank sometimes acts in an emergency between normal announcement dates. 
A) The Bank of Canada's choice of monetary policy instrument is the overnight loans rate. 
B) Although the Bank of Canada can change the overnight rate by any reasonable amount that it chooses, it normally changes the overnight rate by a single point at a time. 
C) In recent years, the overnight loans rate has been at historically low levels. 
D) Since late 2000, the Bank has established eight fixed dates on which it announces its overnight loans rate target for the coming period of approximately six weeks. 
E) The Bank sometimes acts in an emergency between normal announcement dates.

Question 7

To decrease aggregate demand, the Bank of Canada can

Accepted Answer

A) raise the overnight loans rate, which decreases the quantity of money. 
B) lower the overnight loans rate, which increases the quantity of money. 
C) lower the overnight loans rate, which decreases the quantity of money. 
D) raise the overnight loans rate, which increases the quantity of money. 
E) raise the overnight loans rate, which decreases the government budget deficit. 
A) raise the overnight loans rate, which decreases the quantity of money. 
B) lower the overnight loans rate, which increases the quantity of money. 
C) lower the overnight loans rate, which decreases the quantity of money. 
D) raise the overnight loans rate, which increases the quantity of money. 
E) raise the overnight loans rate, which decreases the government budget deficit.

Question 8

Choose the correct statement.

Accepted Answer

A) Demand and supply in the loanable funds market determine the long-term real interest rate. 
B) The long-term real interest rate influences expenditure decisions. 
C) In the short run, the supply of loanable funds is influenced by the supply of bank loans. 
D) A fall in the overnight loans rate that increases the supply of bank loans increases the supply of loanable funds and lowers the equilibrium real interest rate. 
E) All of the above are correct. 
A) Demand and supply in the loanable funds market determine the long-term real interest rate. 
B) The long-term real interest rate influences expenditure decisions. 
C) In the short run, the supply of loanable funds is influenced by the supply of bank loans. 
D) A fall in the overnight loans rate that increases the supply of bank loans increases the supply of loanable funds and lowers the equilibrium real interest rate. 
E) All of the above are correct.

Question 9

To combat a recession, the Bank of Canada ________ the overnight loans rate, which ________ the quantity of money.

Accepted Answer

A) raises; increases 
B) lowers; increases 
C) raises; decreases 
D) lowers; decreases 
E) lowers; decreases the demand for bank reserves and increases 
A) raises; increases 
B) lowers; increases 
C) raises; decreases 
D) lowers; decreases 
E) lowers; decreases the demand for bank reserves and increases

Question 10

The Bank of Canada raises the overnight loans rate. In the foreign exchange market people ________ dollars and the price of the dollar ________ because the Canadian interest rate differential ________.

Accepted Answer

A) sell; rises; falls 
B) sell; falls; falls 
C) buy; rises; rises 
D) buy; falls; rises 
E) buy; rises; falls 
A) sell; rises; falls 
B) sell; falls; falls 
C) buy; rises; rises 
D) buy; falls; rises 
E) buy; rises; falls

Question 11

If the Bank of Canada is concerned with inflation it will ________ the overnight loans rate to ________.

Accepted Answer

A) raise; increase aggregate demand 
B) lower; increase aggregate demand 
C) raise; decrease aggregate demand 
D) lower; decrease aggregate demand 
E) raise; increase potential GDP 
A) raise; increase aggregate demand 
B) lower; increase aggregate demand 
C) raise; decrease aggregate demand 
D) lower; decrease aggregate demand 
E) raise; increase potential GDP

Question 12

When the Bank of Canada fights recession by lowering the overnight loan rate, the supply of loanable funds curve shifts ________, and the aggregate demand curve shifts ________.

Accepted Answer

A) leftward; leftward 
B) leftward; rightward 
C) rightward; leftward 
D) rightward; rightward 
E) rightward and the demand for loanable funds curve shifts rightward; rightward 
A) leftward; leftward 
B) leftward; rightward 
C) rightward; leftward 
D) rightward; rightward 
E) rightward and the demand for loanable funds curve shifts rightward; rightward

Question 13

The overnight rate is determined by equilibrium in the market for ________. The overnight rate ________.

Accepted Answer

A) loanable funds; equals the real interest rate minus the inflation rate 
B) reserves; is the rate that sets the quantity of reserves demanded equal to the quantity of reserves supplied 
C) loanable funds; equals the real interest rate 
D) reserves; equals the real interest rate minus the inflation rate 
E) money; equals the real interest rate 
A) loanable funds; equals the real interest rate minus the inflation rate 
B) reserves; is the rate that sets the quantity of reserves demanded equal to the quantity of reserves supplied 
C) loanable funds; equals the real interest rate 
D) reserves; equals the real interest rate minus the inflation rate 
E) money; equals the real interest rate

Question 14

The policy tools used by the Bank of Canada include

Accepted Answer

A) prime rate and bank rate. 
B) the operating band and open market operations. 
C) open market operations and prime rate. 
D) prime rate and the exchange rate. 
E) the exchange rate and open market operations. 
A) prime rate and bank rate. 
B) the operating band and open market operations. 
C) open market operations and prime rate. 
D) prime rate and the exchange rate. 
E) the exchange rate and open market operations.

Question 15

The current overnight loans rate is 3 percent, with the Bank of Canada's operating band set at 2.75 to 3.25 percent. If the Bank of Canada lowers their operating band to 2.25 to 2.75 percent, which of the following is one of the reasons the overnight rate will fall to within this new range?

Accepted Answer

A) Since the banking system can now borrow from the Bank of Canada at 2.75 percent, no bank would borrow on the overnight loan market at 3 percent. 
B) Since the banking system can now borrow from the Bank of Canada at 2.25 percent, no bank would borrow on the overnight loan market at 3 percent. 
C) Since the banking system can now earn 2.75 percent from the Bank of Canada, no bank would lend on the overnight loan market at 3 percent. 
D) Since the banking system can now earn 2.25 percent from the Bank of Canada, no bank would lend on the overnight loan market at 3 percent. 
E) There is a legal requirement that the overnight rate must be within the Bank of Canada's operating band. 
A) Since the banking system can now borrow from the Bank of Canada at 2.75 percent, no bank would borrow on the overnight loan market at 3 percent. 
B) Since the banking system can now borrow from the Bank of Canada at 2.25 percent, no bank would borrow on the overnight loan market at 3 percent. 
C) Since the banking system can now earn 2.75 percent from the Bank of Canada, no bank would lend on the overnight loan market at 3 percent. 
D) Since the banking system can now earn 2.25 percent from the Bank of Canada, no bank would lend on the overnight loan market at 3 percent. 
E) There is a legal requirement that the overnight rate must be within the Bank of Canada's operating band.

Question 16

How is responsibility for monetary policy set forth in Canada?

Accepted Answer

A) The Canadian Government administers monetary policy through the office of the Minister of Finance. 
B) The Bank of Canada administers monetary policy as directed by the Minister of Finance. 
C) The Bank of Canada Act places responsibility for the conduct of monetary policy on the Bank's Governing Council. 
D) The Prime Minister bears ultimate responsibility for monetary policy. 
E) Both B and D 
A) The Canadian Government administers monetary policy through the office of the Minister of Finance. 
B) The Bank of Canada administers monetary policy as directed by the Minister of Finance. 
C) The Bank of Canada Act places responsibility for the conduct of monetary policy on the Bank's Governing Council. 
D) The Prime Minister bears ultimate responsibility for monetary policy. 
E) Both B and D

Question 17

When the Bank of Canada fights inflation by implementing open market operations, the supply of loanable funds curve shifts ________ and the aggregate demand curve shifts ________.

Accepted Answer

A) leftward; leftward 
B) leftward; rightward 
C) rightward; leftward 
D) rightward; rightward 
E) leftward; leftward, and potential GDP decreases 
A) leftward; leftward 
B) leftward; rightward 
C) rightward; leftward 
D) rightward; rightward 
E) leftward; leftward, and potential GDP decreases

Question 18

Which of the following does not occur as a result of the Bank of Canada lowering the overnight loans rate?

Accepted Answer

A) The supply of loanable funds increases. 
B) The long-term real interest rate falls. 
C) Exports increase. 
D) The inflation rate decreases. 
E) Imports decrease. 
A) The supply of loanable funds increases. 
B) The long-term real interest rate falls. 
C) Exports increase. 
D) The inflation rate decreases. 
E) Imports decrease.

Question 19

Use the figure below to answer the following question.
   
Figure 30.3.2
-Refer to Figure 30.3.2. The figure shows the economy of Freezone. Potential GDP is $250 billion. To return the economy to full employment, the central bank can ________ the overnight rate and ________ securities.

Accepted Answer

A) lower; sell 
B) raise; sell 
C) raise; buy 
D) lower; buy 
E) lower; not change its holdings of 
A) lower; sell 
B) raise; sell 
C) raise; buy 
D) lower; buy 
E) lower; not change its holdings of

Question 20

Monetary policy is difficult to conduct because

Accepted Answer

A) the monetary policy transmission process is long and drawn out. 
B) the tools available don't work. 
C) politicians frequently block the policy's intended outcomes. 
D) the interest rate always rises. 
E) it takes several years for the real GDP growth rate to respond to a change in the interest rate. 
A) the monetary policy transmission process is long and drawn out. 
B) the tools available don't work. 
C) politicians frequently block the policy's intended outcomes. 
D) the interest rate always rises. 
E) it takes several years for the real GDP growth rate to respond to a change in the interest rate.

Exam 30: Monetary Policy

The objective of the Bank of Canada's monetary policy is

Suppose the inflation rate is 3 percent and the output gap is -1 percent. Using the Taylor rule, the Bank of Canada sets the overnight loans rate equal to

When the Bank of Canada fights inflation by implementing an open market operation, the supply of reserves curve shifts ________ and the supply of money curve shifts ________.

Choose the statement that is incorrect.

Why does the Bank of Canada pay close attention to the core inflation rate in addition to the overall CPI inflation rate?

Choose the statement that is incorrect.

To decrease aggregate demand, the Bank of Canada can

Choose the correct statement.

To combat a recession, the Bank of Canada ________ the overnight loans rate, which ________ the quantity of money.

The Bank of Canada raises the overnight loans rate. In the foreign exchange market people ________ dollars and the price of the dollar ________ because the Canadian interest rate differential ________.

If the Bank of Canada is concerned with inflation it will ________ the overnight loans rate to ________.

When the Bank of Canada fights recession by lowering the overnight loan rate, the supply of loanable funds curve shifts ________, and the aggregate demand curve shifts ________.

The overnight rate is determined by equilibrium in the market for ________. The overnight rate ________.

The policy tools used by the Bank of Canada include

The current overnight loans rate is 3 percent, with the Bank of Canada's operating band set at 2.75 to 3.25 percent. If the Bank of Canada lowers their operating band to 2.25 to 2.75 percent, which of the following is one of the reasons the overnight rate will fall to within this new range?

How is responsibility for monetary policy set forth in Canada?

When the Bank of Canada fights inflation by implementing open market operations, the supply of loanable funds curve shifts ________ and the aggregate demand curve shifts ________.

Which of the following does not occur as a result of the Bank of Canada lowering the overnight loans rate?

Use the figure below to answer the following question. Figure 30.3.2 -Refer to Figure 30.3.2. The figure shows the economy of Freezone. Potential GDP is $250 billion. To return the economy to full employment, the central bank can ________ the overnight rate and ________ securities.

Monetary policy is difficult to conduct because

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When the Bank of Canada fights inflation by implementing an open market operation, the supply of reserves curve shifts and the supply of money curve shifts .

To combat a recession, the Bank of Canada the overnight loans rate, which the quantity of money.

The Bank of Canada raises the overnight loans rate. In the foreign exchange market people dollars and the price of the dollar because the Canadian interest rate differential .

If the Bank of Canada is concerned with inflation it will the overnight loans rate to .

When the Bank of Canada fights recession by lowering the overnight loan rate, the supply of loanable funds curve shifts , and the aggregate demand curve shifts .

The overnight rate is determined by equilibrium in the market for . The overnight rate .

When the Bank of Canada fights inflation by implementing open market operations, the supply of loanable funds curve shifts and the aggregate demand curve shifts .

Use the figure below to answer the following question. Figure 30.3.2 -Refer to Figure 30.3.2. The figure shows the economy of Freezone. Potential GDP is $250 billion. To return the economy to full employment, the central bank can the overnight rate and securities.