Question 1

The operating band is

Accepted Answer

A) the interest rate that is established through an open market operation. 
B) the target overnight interest rate plus or minus 25 basis points. 
C) the target inflation rate plus or minus a quarter of a percentage point. 
D) a half percentage point range in the target inflation rate. 
E) the range between the lending rate and the borrowing rate. 
A) the interest rate that is established through an open market operation. 
B) the target overnight interest rate plus or minus 25 basis points. 
C) the target inflation rate plus or minus a quarter of a percentage point. 
D) a half percentage point range in the target inflation rate. 
E) the range between the lending rate and the borrowing rate.

Question 2

If the Bank of Canada lowers the overnight loans rate, other short-term interest rates ________ and the exchange rate ________.

Accepted Answer

A) fall; falls 
B) fall; does not change 
C) fall; rises 
D) do not change; falls 
E) fall, and the long-term interest rate rises; falls 
A) fall; falls 
B) fall; does not change 
C) fall; rises 
D) do not change; falls 
E) fall, and the long-term interest rate rises; falls

Question 3

One criticism of the Bank of Canada's focus on an inflation control target is that

Accepted Answer

A) if inflation falls below the target range, a recession will result. 
B) if inflation edges above the target range, the Bank decreases aggregate demand and could create a recession. 
C) the Bank pays too much attention to unemployment and real GDP growth and not enough to inflation control. 
D) it makes setting expectations of inflation difficult. 
E) the Bank rarely achieves its target. 
A) if inflation falls below the target range, a recession will result. 
B) if inflation edges above the target range, the Bank decreases aggregate demand and could create a recession. 
C) the Bank pays too much attention to unemployment and real GDP growth and not enough to inflation control. 
D) it makes setting expectations of inflation difficult. 
E) the Bank rarely achieves its target.

Question 4

If the Bank of Canada wants to stimulate the economy to limit the effects of a recessionary gap, then it ________ the overnight loans rate to ________ the real interest rate and ________ investment.

Accepted Answer

A) lowers; lower; increase 
B) lowers; raise; increase 
C) raises; raise; decrease 
D) lowers; lower; decrease 
E) lowers; raise; decrease 
A) lowers; lower; increase 
B) lowers; raise; increase 
C) raises; raise; decrease 
D) lowers; lower; decrease 
E) lowers; raise; decrease

Question 5

How is consultation between the Bank of Canada and the Government of Canada on monetary policy arranged?

Accepted Answer

A) Consultations are arranged at the discretion of the Minister of Finance. 
B) No consultation is required or needed. 
C) The Bank of Canada Act requires regular consultations between the Governor and the Minister of Finance. 
D) Consultations are arranged at the discretion of the Governor of the Bank of Canada. 
E) Consultations are arranged through the Parliamentary Committee on Finance. 
A) Consultations are arranged at the discretion of the Minister of Finance. 
B) No consultation is required or needed. 
C) The Bank of Canada Act requires regular consultations between the Governor and the Minister of Finance. 
D) Consultations are arranged at the discretion of the Governor of the Bank of Canada. 
E) Consultations are arranged through the Parliamentary Committee on Finance.

Question 6

Choose the statement that is incorrect.

Accepted Answer

A) The Bank of Canada's strategy of inflation rate targeting that keeps the inflation rate low and stable makes the maximum possible contribution towards achieving full employment and sustained economic growth. 
B) The Bank of Canada's strategy of inflation rate targeting has resulted in an inflation rate that is 0.3 percent per year below the core CPI inflation rate since 2000. 
C) The last time the Bank of Canada created a recession was at the beginning of the 1990s when it was faced with the threat of ongoing double-digit inflation. 
D) The Bank of Canada's monetary policy is sensitive to the state of employment while maintaining its focus on achieving its inflation target. 
E) The inflation-control target uses the Consumer Price Index as the measure of inflation. 
A) The Bank of Canada's strategy of inflation rate targeting that keeps the inflation rate low and stable makes the maximum possible contribution towards achieving full employment and sustained economic growth. 
B) The Bank of Canada's strategy of inflation rate targeting has resulted in an inflation rate that is 0.3 percent per year below the core CPI inflation rate since 2000. 
C) The last time the Bank of Canada created a recession was at the beginning of the 1990s when it was faced with the threat of ongoing double-digit inflation. 
D) The Bank of Canada's monetary policy is sensitive to the state of employment while maintaining its focus on achieving its inflation target. 
E) The inflation-control target uses the Consumer Price Index as the measure of inflation.

Question 7

To lower interest rates, the Bank of Canada can

Accepted Answer

A) increase the treasury bill rate. 
B) raise the exchange rate. 
C) buy government securities. 
D) decrease bank reserves. 
E) raise the bank rate. 
A) increase the treasury bill rate. 
B) raise the exchange rate. 
C) buy government securities. 
D) decrease bank reserves. 
E) raise the bank rate.

Question 8

The ripple effects that occur when the Bank of Canada raises the overnight loan rate include

Accepted Answer

A) a decrease in consumption expenditure and investment. 
B) an increase in net exports. 
C) a decrease in short-run interest rates. 
D) an increase in short-run aggregate supply. 
E) a decrease in short-run aggregate supply. 
A) a decrease in consumption expenditure and investment. 
B) an increase in net exports. 
C) a decrease in short-run interest rates. 
D) an increase in short-run aggregate supply. 
E) a decrease in short-run aggregate supply.

Question 9

If the Bank of Canada buys government securities in the open market, the supply curve of real money

Accepted Answer

A) shifts leftward and the overnight loans rate rises. 
B) shifts leftward and the overnight loans rate falls. 
C) shifts rightward and the overnight loans rate rises. 
D) shifts rightward and the overnight loans rate remains constant because the demand for money increases at the same time. 
E) shifts rightward and the overnight loans rate falls 
A) shifts leftward and the overnight loans rate rises. 
B) shifts leftward and the overnight loans rate falls. 
C) shifts rightward and the overnight loans rate rises. 
D) shifts rightward and the overnight loans rate remains constant because the demand for money increases at the same time. 
E) shifts rightward and the overnight loans rate falls

Question 10

The settlement balances rate is the

Accepted Answer

A) proportion of outstanding loans from chartered banks that are resolved. 
B) interest rate that the Bank of Canada charges the big banks on loans. 
C) interest rate paid to chartered banks on their reserves held at the Bank of Canada. 
D) ratio of the value securities sold by the Bank of Canada to securities outstanding. 
E) proportion of overnight inter-bank loans that are resolved. 
A) proportion of outstanding loans from chartered banks that are resolved. 
B) interest rate that the Bank of Canada charges the big banks on loans. 
C) interest rate paid to chartered banks on their reserves held at the Bank of Canada. 
D) ratio of the value securities sold by the Bank of Canada to securities outstanding. 
E) proportion of overnight inter-bank loans that are resolved.

Question 11

The sale of government bonds by the Bank of Canada

Accepted Answer

A) lowers interest rates. 
B) decreases bank reserves. 
C) increases the quantity of money. 
D) increases the banks' loans to the public. 
E) increases bank reserves. 
A) lowers interest rates. 
B) decreases bank reserves. 
C) increases the quantity of money. 
D) increases the banks' loans to the public. 
E) increases bank reserves.

Question 12

Core inflation is the percentage change in

Accepted Answer

A) the Consumer Price Index including the eight most volatile prices. 
B) an inflation rate that ranges between 1 percent and 3 percent annually. 
C) the Consumer Price Index excluding the eight most volatile prices. 
D) the average of the 8 most volatile prices in the Consumer Price Index. 
E) the target midpoint inflation rate of 2 percent per year. 
A) the Consumer Price Index including the eight most volatile prices. 
B) an inflation rate that ranges between 1 percent and 3 percent annually. 
C) the Consumer Price Index excluding the eight most volatile prices. 
D) the average of the 8 most volatile prices in the Consumer Price Index. 
E) the target midpoint inflation rate of 2 percent per year.

Question 13

If a central bank wants to implement a contractionary policy that decreases real GDP, it conducts an open market operation by ________ securities. Bank reserves ________ and the supply of loanable funds ________. The quantity of money ________.

Accepted Answer

A) selling; decrease; decreases; decreases 
B) purchasing; decrease; decreases; decreases 
C) purchasing; decrease; increases; decreases 
D) selling; increase; increases; increases 
E) purchasing; increase; increases; increases 
A) selling; decrease; decreases; decreases 
B) purchasing; decrease; decreases; decreases 
C) purchasing; decrease; increases; decreases 
D) selling; increase; increases; increases 
E) purchasing; increase; increases; increases

Question 14

If the overnight rate is below target, the Bank ________ securities to ________ reserves, which ________ the supply of overnight funds and ________ the overnight rate.

Accepted Answer

A) buys; increase; decreases; raises 
B) sells; increase; increases; lowers 
C) buys; decrease; decreases; raises 
D) sells; decrease; decreases; raises 
E) buys; increase; increases; lowers 
A) buys; increase; decreases; raises 
B) sells; increase; increases; lowers 
C) buys; decrease; decreases; raises 
D) sells; decrease; decreases; raises 
E) buys; increase; increases; lowers

Question 15

If Canadian interest rates rise, the exchange rate value of the dollar ________ and net exports ________.

Accepted Answer

A) rises; increase 
B) rises; decrease 
C) falls; increase 
D) falls; decrease 
E) rises only if the U.S. interest rates fall concurrently; decrease 
A) rises; increase 
B) rises; decrease 
C) falls; increase 
D) falls; decrease 
E) rises only if the U.S. interest rates fall concurrently; decrease

Question 16

How can the Bank of Canada use the bank rate to regulate the overnight loans rate?

Accepted Answer

A) The overnight loans rate is set at a quarter percentage point above the bank rate, which in turn is set by the Bank of Canada. 
B) The bank rate is set at the settlement balances rate plus 0.25 percentage points. 
C) The bank rate is set at 0.25 percentage points below the settlement balances rate, which is used to determine the overnight loans rate. 
D) The overnight loans rate is set at 25 basis points above the bank rate. 
E) The bank rate is set at the target overnight rate plus 0.25 percentage points. 
A) The overnight loans rate is set at a quarter percentage point above the bank rate, which in turn is set by the Bank of Canada. 
B) The bank rate is set at the settlement balances rate plus 0.25 percentage points. 
C) The bank rate is set at 0.25 percentage points below the settlement balances rate, which is used to determine the overnight loans rate. 
D) The overnight loans rate is set at 25 basis points above the bank rate. 
E) The bank rate is set at the target overnight rate plus 0.25 percentage points.

Question 17

In an open market operation aimed at increasing expenditure, the Bank of Canada

Accepted Answer

A) sells government bonds, decreasing bank reserves, decreasing lending, decreasing the overnight rate. 
B) sells government bonds, decreasing bank reserves, decreasing lending, increasing the overnight rate. 
C) sells government bonds, decreasing bank reserves, increasing lending, increasing the overnight rate. 
D) buys government bonds, increasing bank reserves, increasing lending, decreasing the overnight rate. 
E) buys government bonds, increasing bank reserves, increasing lending, increasing the overnight rate. 
A) sells government bonds, decreasing bank reserves, decreasing lending, decreasing the overnight rate. 
B) sells government bonds, decreasing bank reserves, decreasing lending, increasing the overnight rate. 
C) sells government bonds, decreasing bank reserves, increasing lending, increasing the overnight rate. 
D) buys government bonds, increasing bank reserves, increasing lending, decreasing the overnight rate. 
E) buys government bonds, increasing bank reserves, increasing lending, increasing the overnight rate.

Exam 30: Monetary Policy

The operating band is

If the Bank of Canada lowers the overnight loans rate, other short-term interest rates ________ and the exchange rate ________.

One criticism of the Bank of Canada's focus on an inflation control target is that

If the Bank of Canada wants to stimulate the economy to limit the effects of a recessionary gap, then it ________ the overnight loans rate to ________ the real interest rate and ________ investment.

How is consultation between the Bank of Canada and the Government of Canada on monetary policy arranged?

Choose the statement that is incorrect.

To lower interest rates, the Bank of Canada can

The ripple effects that occur when the Bank of Canada raises the overnight loan rate include

If the Bank of Canada buys government securities in the open market, the supply curve of real money

The settlement balances rate is the

The sale of government bonds by the Bank of Canada

Core inflation is the percentage change in

If a central bank wants to implement a contractionary policy that decreases real GDP, it conducts an open market operation by ________ securities. Bank reserves ________ and the supply of loanable funds ________. The quantity of money ________.

If the overnight rate is below target, the Bank ________ securities to ________ reserves, which ________ the supply of overnight funds and ________ the overnight rate.

If Canadian interest rates rise, the exchange rate value of the dollar ________ and net exports ________.

How can the Bank of Canada use the bank rate to regulate the overnight loans rate?

In an open market operation aimed at increasing expenditure, the Bank of Canada

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If the Bank of Canada lowers the overnight loans rate, other short-term interest rates and the exchange rate .

If the Bank of Canada wants to stimulate the economy to limit the effects of a recessionary gap, then it the overnight loans rate to the real interest rate and investment.

If a central bank wants to implement a contractionary policy that decreases real GDP, it conducts an open market operation by securities. Bank reserves and the supply of loanable funds . The quantity of money .

If the overnight rate is below target, the Bank securities to reserves, which the supply of overnight funds and the overnight rate.

If Canadian interest rates rise, the exchange rate value of the dollar and net exports .