Exam 11: Monetary Policy

A decrease in interest rates can ________ the demand for stocks as stocks become relatively ________ attractive investments as compared to bonds.

Use the money demand and money supply model to show the money market in equilibrium with an interest rate of 5 percent and the quantity of money of $80 billion.Suppose the Bank of Canada increases the money supply to $85 billion.At the previous equilibrium interest rate of 5 percent, will households and firms now be holding more money or less money than they want to hold, and will they be buying or selling short-term financial assets? At the new equilibrium interest rate, households and firms will desire to hold the entire $85 billion of the money supply.What causes households and firms to want to hold the additional $5 billion of the money supply?

If the Bank of Canada lowers its target for the overnight interest rate, this indicates that

Figure 11.9 Alt text for Figure 11.9: In figure 11.9, a static AD-AS model. Long description for Figure 11.9: The x-axis is labelled, real GDP (trillions of 2007 dollars)and the y-axis is labelled, price level (CPI).5 lines are shown; AD1, AD2, AD3, LRAS, SRAS.Line AD1 begins in the top left corner and slopes down to the end of the x-axis.Line AD2 follows the same slope but is plotted to the left.Similarly, line AD3 is plotted to the left of line AD2.Line SRAS begins close to the vertex and slopes up to the top right corner.Line LRAS is perpendicular to the x-axis, and passes through points D, B, and E.Lines AD3 and SRAS intersect at point A.Lines AD2, LRAS, and SRAS intersect at point B.Lines AD1 and SRAS intersect at point C.Lines AD1 and LRAS intersect at point D.Lines AD3 and LRAS intersect at point E. -Refer to Figure 11.9.Suppose the Bank of Canada sells government of Canada bonds in pursuit of contractionary monetary policy.Using the static AD-AS model in the figure above, this situation would be depicted as a movement from

Using the money demand and money supply model, an open market purchase of government of Canada securities by the Bank of Canada would cause the equilibrium interest rate to

In the countries that have adopted inflation targeting, the inflation rate has typically

What actions should the Bank of Canada take if it believes the economy is about to fall into recession?

The money demand curve, against possible levels of interest rates, has a

Write out the expression for the Taylor rule.Use the Taylor rule to explain how a decline in real GDP below potential GDP will affect the Bank of Canada's target for the overnight interest rate.

Which of the following is true about the Bank of Canada and its ability to prevent recessions? The Bank of Canada

The U.S.Federal Reserve and the US Treasury responded to the 2008 financial crisis in several ways.Which of the following is not one of the ways the Fed and the Treasury responded?

Consider the Taylor rule for the target of the overnight interest rate.Suppose the equilibrium real overnight interest rate is 2 percent, the target rate of inflation is 3 percent, the current inflation rate is 3 percent, real GDP equals potential real GDP, and the weights are 1/2 for the inflation gap and the output gap.Using the Taylor rule, what does the target for the overnight interest rate equal? Next, if the Bank of Canada lowered the target for the inflation rate to 1 percent, how much would the target for the overnight interest rate change?

Mortgage lenders often resell mortgages in secondary markets.How might this make lenders act differently than if they intended to hold the mortgages themselves?

The goals of monetary policy tend to be interrelated.For example, when the Bank of Canada pursues the goal of ________, it also can achieve the goal of ________ simultaneously.

The United States saw a housing bubble and banking crisis emerge between 2007-2009.When did Canada see its housing bubble and banking crisis emerge?

Explain the two inflation targets specified by the Bank of Canada and their rationale.

In response to already low interest rates doing little to stimulate the economy, the U.S.Federal Reserve began buying 10-year Treasury notes and certain mortgage-backed securities to keep interest rates low.This policy is known as

Table 11.6 -Refer to Table 11.6.Suppose the table illustrates the values of real and potential GDP and the price level if the Bank of Canada does not change its current policy to be more contractionary or expansionary.If the Bank of Canada wants to keep real GDP at its potential level in 2015, should the Bank of Canada use a contractionary or expansionary policy? How should it conduct open market operations to achieve its goal?

By the height of the U.S.housing bubble in 2005 and early 2006, lenders in the United States had greatly loosened the standards for obtaining a mortgage loan, with many mortgages being granted to sub-prime borrowers ________ and "Alt-A" borrowers ________.

The Bank of Canada can increase the overnight interest rate by