Question 1

From an initial long-run macroeconomic equilibrium, if the Bank of Canada anticipated that next year aggregate demand would grow significantly faster than long-run aggregate supply, then the Bank of Canada would most likely

Accepted Answer

A) increase income tax rates. 
B) decrease income tax rates. 
C) increase interest rates. 
D) decrease interest rates. 
E) decrease the operating band for the bank rate.

Question 2

The Bank of Canada, the Department of Finance, and the Office of the Superintendent of Financial Institutions are all alarmed by the high household debt to after-tax income ratio of Canadians and the overheated housing marked caused by

Accepted Answer

A) U)S.government intervention. 
B) interest rates kept at historic long lows. 
C) overuse of monetary policy and fiscal policy. 
D) uncoordinated use of monetary policy and fiscal policy. 
E) excessive government deficit spending.

Question 3

Based on the information below and the Taylor Rule, what is the appropriate target for the overnight rate? Current inflation = 9% Equilibrium real interest rate = 0% Inflation target = 2%
Output Gap = 1% Unemployment rate = 10.3%

Accepted Answer

A) 13% 
B) 13.5% 
C) 16.5% 
D) 8.5% 
E) 23.3%

Question 4

An argument in favour of using inflation targeting, as the Bank of Canada does, is that in the long run, it can have an impact on inflation but not on real GDP.

Accepted Answer

A) True 
 B)False

Question 5

An increase in the interest rate should ________ the demand for dollars and the value of the dollar, and net exports should ________.

Accepted Answer

A) decrease; decrease 
B) decrease; increase 
C) increase; decrease 
D) increase; increase 
E) increase; not change

Question 6

The best definition for a bubble in a stock market is?

Accepted Answer

A) a period of rapidly rising stock prices after a sharp fall in stock prices 
B) sustained and steady growth in stock prices in line with economic growth 
C) a rapid increase stock prices to levels inconsistent with the profitability of firms 
D) quickly rising stock prices caused by rapid growth in the population 
E) a rapid drop in stock prices once new information about the market is revealed

Question 7

Figure 11.3  Alt text for Figure 11.3: In figure 11.3, a graph shows shift in money supply.
Long description for Figure 11.3: The x-axis is labelled, quantity of money, M (billions of dollars), with values $90 and 95 marked.The y-axis is labelled, interest rate, i, with values 2 and 3% marked.3 lines are shown; MS1, MS2, and MD.Line MD begins in the top left corner and slopes down to the end of the x-axis.Line Money, supply MS1, is perpendicular to the x-axis, and begins from the value $90.Line MS2 is perpendicular to the x-axis, and begins from the value 95, to the right of line MS1.Line MD meets line MS1 at point ($90, 3%), approximately 3 quarters of the way along both lines.Line MD meets line MS2 at point (95, 2), almost half way along both lines.These points of intersection are connected to their respective coordinates on the y-axis using dotted lines.
-Refer to Figure 11.3.In the figure above, when the money supply shifts from MS1 to MS2, at the interest rate of 3 percent households and firms will

Accepted Answer

A) buy Canada bonds. 
B) sell Canada bonds. 
C) neither buy nor sell Canada bonds. 
D) want to hold more money. 
E) increase their savings.

Question 8

Expansionary monetary policy refers to the Bank of Canada's increasing the money supply and increasing interest rates to increase real GDP.

Accepted Answer

A) True 
 B)False

Question 9

One of the monetary policy goals of the Bank of Canada is price stability.

Accepted Answer

A) True 
 B)False

Question 10

Over the last approximately 20 years, the consumer price index (CPI)and the core CPI have

Accepted Answer

A) moved roughly together, with the CPI being the most stable. 
B) not moved together, with the core CPI being the most stable. 
C) moved roughly together, with the core CPI being the most stable. 
D) not moved together, with the CPI being the most stable. 
E) moved together initially, with the core CPI become disconnected from CPI recently.

Question 11

The argument advanced by economist Milton Friedman for adopting a monetary growth rule is that

Accepted Answer

A) active monetary policy potentially destabilizes the economy. 
B) central banks can control the money supply, but not the level of interest rates. 
C) a constant rate of growth in the money supply would eliminate the booms and recessions that make up the business cycle. 
D) the growth rate of M1+ has been unstable. 
E) active monetary policy is the only defense a modern economy has against recession.

Question 12

If the Bank of Canada raises the overnight interest rate, this will ________ inflation and ________ real GDP in the short run.

Accepted Answer

A) reduce; raise 
B) increase; lower 
C) increase; raise 
D) reduce; lower

Question 13

Lowering the interest rate will

Accepted Answer

A) decrease spending on consumer durables. 
B) increase investment projects by firms. 
C) decrease spending on new homes. 
D) decrease the value of the dollar and lower net exports. 
E) increase government spending.

Question 14

The main goal of monetary policy for the Bank of Canada recently has been to maintain high employment in labour markets.

Accepted Answer

A) True 
 B)False

Question 15

Food and energy prices are omitted from the core CPI because

Accepted Answer

A) their vulnerability to fluctuations for reasons that may not be related to general inflation and that are not readily controlled by monetary policy. 
B) the majority of food and energy are purchased by large firms rather than consumers, making them a poor reflection of inflation faced by households. 
C) the provision of food and energy is more related to services than goods. 
D) it is a fixed market-basket price index that does not allow the mix of products to change each year. 
E) Food and energy make up a very small portion of household spending.

Question 16

An increase in the domestic interest rate relative to other interest rates should

Accepted Answer

A) increase investment spending. 
B) decrease consumption spending. 
C) decrease government spending. 
D) increase net exports. 
E) decrease the exchange rate.

Question 17

The Bank of Canada does not regulate financial institutions, but it does act as the "lender of last resort" by lending to commercial banks when they are temporarily short of funds.The goal of the Bank of Canada filling this role is to

Accepted Answer

A) reduce the rate of inflation. 
B) stimulate economic growth. 
C) reduce unemployment. 
D) reassure financial markets and promote financial stability. 
E) reduce the current account deficit.

Question 18

Suppose the equilibrium real overnight interest rate is 2 percent, the target rate of inflation is 2 percent, the current inflation rate is 4 percent, and real GDP is 2 percent above potential real GDP.If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the overnight interest target rate equals

Accepted Answer

A) 2 percent. 
B) 4 percent. 
C) 6 percent. 
D) 8 percent. 
E) 10 percent.

Question 19

Although the U.S.Federal Reserve had traditionally made discount loans only to ________, in response to the financial crisis in 2008 the U.S.Federal Reserve made primary dealers eligible for discount loans as well.

Accepted Answer

A) commercial banks 
B) government agencies 
C) investment banks 
D) mortgage lenders 
E) the federal government

Question 20

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 lowers its target for the overnight interest rate.Using the static AD-AS model in the figure above, this situation would be depicted as a movement from

Accepted Answer

A) A to B. 
B) B to A. 
C) C to B. 
D) E to A. 
E) C to D.

Exam 11: Monetary Policy

From an initial long-run macroeconomic equilibrium, if the Bank of Canada anticipated that next year aggregate demand would grow significantly faster than long-run aggregate supply, then the Bank of Canada would most likely

The Bank of Canada, the Department of Finance, and the Office of the Superintendent of Financial Institutions are all alarmed by the high household debt to after-tax income ratio of Canadians and the overheated housing marked caused by

Based on the information below and the Taylor Rule, what is the appropriate target for the overnight rate? Current inflation = 9% Equilibrium real interest rate = 0% Inflation target = 2% Output Gap = 1% Unemployment rate = 10.3%

An argument in favour of using inflation targeting, as the Bank of Canada does, is that in the long run, it can have an impact on inflation but not on real GDP.

An increase in the interest rate should the demand for dollars and the value of the dollar, and net exports should .

The best definition for a bubble in a stock market is?

Expansionary monetary policy refers to the Bank of Canada's increasing the money supply and increasing interest rates to increase real GDP.

One of the monetary policy goals of the Bank of Canada is price stability.

Over the last approximately 20 years, the consumer price index (CPI) and the core CPI have

The argument advanced by economist Milton Friedman for adopting a monetary growth rule is that

If the Bank of Canada raises the overnight interest rate, this will inflation and real GDP in the short run.

Lowering the interest rate will

The main goal of monetary policy for the Bank of Canada recently has been to maintain high employment in labour markets.

Food and energy prices are omitted from the core CPI because

An increase in the domestic interest rate relative to other interest rates should

The Bank of Canada does not regulate financial institutions, but it does act as the "lender of last resort" by lending to commercial banks when they are temporarily short of funds.The goal of the Bank of Canada filling this role is to

Although the U.S.Federal Reserve had traditionally made discount loans only to ________, in response to the financial crisis in 2008 the U.S.Federal Reserve made primary dealers eligible for discount loans as well.