econ 102 chapter 30

16)An instrument rule is a monetary policy rule that sets the policy instrument A) based on the current state of the economy. B) at a rate counter-cyclical to the current inflation rate. C) at the discretion of the monetary authority. D) based on the overnight loans rate. E) at a level that makes the forecast of the policy target equal to the target.

A

21)How does the Bank of Canada set the bank rate? A) The bank rate is set at a quarter percentage point above the overnight loans rate. B) The Bank of Canada does not determine the bank rate. C) The bank rate is set at 25 basis points above the operating band. D) The bank rate is set at a quarter percentage point above the prime lending rate. E) The bank rate is set at a quarter percentage point below the overnight loans rate.

A

28)If the Bank of Canada aims to lower the overnight rate, it will A) lower the bank rate and settlement balances rate, as well as buy government securities. B) lower the bank rate and settlement balances rate, as well as sell government securities. C) lower the bank rate, increase the settlement balances rate, as well as buy government securities. D) raise the bank rate and settlement balances rate, as well as sell government securities. E) raise the bank rate and settlement balances rate, as well as buy government securities.

A

30)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? 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 earn 2.75 percent from the Bank of Canada, no bank would lend on the overnight loan market at 3 percent. C) 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. D) 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. E) There is a legal requirement that the overnight rate must be within the Bank of Canada's operating band.

A

31)When the Bank of Canada buys securities, reserves ________. The Bank of Canada's assets ________ and its liabilities ________. A) increase; increase; increase B) decrease; decrease; decrease C) increase; increase; decrease D) decrease; decrease; increase E) increase; decrease; increase

A

32)When the Bank of Canada sells securities, the interest rate ________. The Bank of Canada's assets and liabilities ________. A) rises; decrease B) falls; increase C) rises; increase during an expansion and decrease during a recession D) falls; increase E) rises; decrease

A

34)If the Bank of Canada buys government bonds, all of the following happens except A) the bank rate rises. B) net exports increase. C) the supply of money increases. D) the supply of loanable funds increases. E) bank reserves increase.

A

36)Which of the following quotations correctly describes the impact of monetary policy on the economy? A) "The extra money pumped into the economy by the central bank is creating more exports." B) "Businesses are investing more, now that monetary policy has become less expansionary." C) "The extra money pumped into the economy by the central bank is creating fewer jobs." D) "The tightening of money growth is helping sell goods abroad." E) "House sales are down lots, due to the higher money growth."

A

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

A

51)When the Bank of Canada lowers the overnight loans rate, the Canadian dollar ________ on the foreign exchange market and ________. A) falls; aggregate demand increases B) falls; the increase in imports is greater than the increase in exports C) falls; aggregate demand decreases D) rises; aggregate demand decreases E) rises; U.S. aggregate demand decreases

A

57)When the Bank of Canada raises the overnight loans rate, other short -term interest rates A) rise, consumption expenditure, investment and net exports decrease, and the aggregate demand curve shifts leftward. B) fall, consumption expenditure, investment and net exports increase, and the aggregate demand curve shifts rightward. C) fall, consumption expenditure, investment and net exports decrease, and the aggregate demand curve shifts leftward. D) rise, consumption expenditure, investment and net exports increase, and the aggregate demand curve shifts rightward. E) none of the above. 11

A

63)When the Bank of Canada lowers the overnight loans rate, there is a ________ shift of the ________ curve. A) rightward; AD B) leftward; SAS C) leftward; AD D) rightward; SAS E) rightward; LAS 12

A

66)When the Bank of Canada fights recession by implementing an open market operation, the supply of reserves curve shifts ________ and the supply of money curve shifts ________. A) rightward; rightward B) leftward; rightward C) rightward; rightward, and the demand for loanable funds increases D) leftward; leftward E) rightward; leftward

A

67)To combat a recession, the Bank of Canada ________ the overnight loans rate, which ________ the quantity of money. A) lowers; increases B) raises; increases C) lowers; decreases the demand for bank reserves and increases D) raises; decreases E) lowers; decreases

A

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

A

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

A

9)The objective of the Bank of Canada's monetary policy is A) to control the quantity of money and interest rates to avoid inflation and when possible prevent excessive swings in real GDP growth and unemployment. B) 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. C) 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. 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

10)The two parts of the inflation-control target are that the inflation-control target range will be ________ percent a year, and policy will aim at keeping the trend of inflation at ________ percent a year. A) -1 to 1; 0 B) 1 to 3; 2 C) 3 to 5; 4 D) 0 to 2; 1 E) 2 to 4; 3

B

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

B

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

B

24)The overnight loans rate is the interest rate A) the Bank of Canada pays on reserves held by banks. B) on overnight loans that members of the Large Value Transfer System make to each other. C) banks pay on term deposits. D) banks charge their best loan customers. E) the Bank of Canada charges when it lends reserves to banks.

B

39)To decrease aggregate demand, the Bank of Canada can A) lower the overnight loans rate, which decreases the quantity of money. B) raise the overnight loans rate, which decreases the quantity of money. C) raise the overnight loans rate, which decreases the government budget deficit. D) raise the overnight loans rate, which increases the quantity of money. E) lower the overnight loans rate, which increases the quantity of money.

B

40)Which of the following statements correctly describes an anti-inflationary monetary policy? A) "The Bank of Canada's recent purchases of government securities is stimulating the housing sector." B) "The Bank of Canada's recent moves to increase the overnight loans rate are leading to less lending and less consumer spending." C) "The Bank of Canada's recent sales of government securities are stimulating the housing sector." D) "The Bank of Canada's recent moves to lower interest rates are behind the recent decreases in the value of the Canadian dollar." E) "The Bank of Canada's recent moves to decrease the value of the Canadian dollar are leading to more spending in the economy."

B

41)Which statement below best expresses the relationship between the 3 -month Treasury bill rate and the overnight loans rate? The rates are A) similar because they are both required to remain with the Bank of Canada's operating band. B) similar because banks can readily substitute between them. C) not similar because the treasury bill rate is set by the Government of Canada whereas the overnight loans rate is set by the Bank of Canada. D) not similar because the treasury bill rate is established through the financial markets whereas the overnight loans rate is set by the Bank of Canada. E) not similar because banks can not readily substitute between them.

B

42)An increase in the quantity of money leads to A) an increase in short-run aggregate supply. B) an increase in aggregate demand. C) a decrease in real GDP. D) a decrease in the price level. E) a decrease in net exports.

B

44)The purchase of government bonds by the Bank of Canada A) decreases the supply of loanable funds. B) increases aggregate demand. C) decreases the quantity of money. D) decreases bank reserves. E) raises the overnight loans rate.

B

48)Which of the following statements about the overnight loans rate is false? A) The overnight loans rate is never less than the 10-year government bond rate. B) The higher the overnight loans rate, the greater the quantity of money. C) The overnight loans rate and the treasury bill rate move closely together. D) The overnight loans rate and the 10-year government bond rate trend in the same direction. E) The overnight loans rate is never less than the long-term corporate bond rate.

B

5)Who are the members of the Bank of Canada's Governing Council? A) The Prime Minister, the Minister of Finance, and the Bank's Governor. B) The Bank's Governor, Senior Deputy Governor, and four Deputy Governors. C) The Ministers of Finance from each province as well as the Federal Minister of Finance. D) The Bank's Governor, Senior Deputy Governor, and four Deputy governors who are appointed by the Prime Minister to represent the public interest. E) The Minister of Finance, the Governor, and four Deputy Governors. 1

B

60)If the Bank of Canada is concerned with recession it will ________ the overnight loans rate to ________. A) raise; decrease aggregate demand B) lower; increase aggregate demand C) raise; increase aggregate demand D) lower; increase potential GDP E) lower; decrease aggregate demand

B

65)The short-run effect of lowering the overnight loans rate is that the A) price level rises and real GDP decreases. B) price level rises and real GDP increases. C) price level lowers and real GDP decreases. D) price level lowers and real GDP increases. E) none of the above.

B

75)The headline "The Bank of Canada Has Cut the Bank Rate" suggests that the Bank of Canada is trying to A) raise the value of the Canadian dollar. B) stimulate aggregate demand. C) help banks make profits. D) increase the overnight loans rate. E) lower inflationary pressures. 14

B

1)Core inflation is the percentage change in A) the Consumer Price Index including the eight most volatile prices. B) the target midpoint inflation rate of 2 percent per year. 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) an inflation rate that ranges between 1 percent and 3 percent annually.

C

12)As the sole issuer of Canadian money, the Bank of Canada can set any one of three variables: A) the exchange rate, the interest rate, and the inflation rate. B) the money base, the interest rate, and the unemployment rate. C) the monetary base, the exchange rate, and the short term interest rate. D) the rate of inflation, the interest rate, and the unemployment rate. E) the inflation rate, the unemployment rate, and the real economic growth rate.

C

15)25 basis points is A) the spread between the savings rate and the lending rate. B) the gap by which real GDP exceeds potential GDP. C) a quarter of a percentage point. D) a quarter of the Bank of Canada's target inflation rate. E) the spread between the bank rate and the settlement balances rate.

C

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

C

29)In an open market operation aimed at increasing expenditure, the Bank of Canada A) sells government bonds, decreasing bank reserves, increasing lending, increasing the overnight rate. B) sells government bonds, decreasing bank reserves, decreasing lending, decreasing the overnight rate. C) buys government bonds, increasing bank reserves, increasing lending, decreasing the overnight rate. D) sells government bonds, decreasing bank reserves, decreasing lending, increasing the overnight rate. E) buys government bonds, increasing bank reserves, increasing lending, increasing the overnight rate. 5

C

4)Which of the following issues is a concern that critics express about the use of an inflation-control target? A) Monetary policy tends to be sensitive to the state of employment while focusing on inflation control targets. B) The policy control rests in the hands of elected officials rather than in the hands of civil servants. C) It encourages a focus on inflation at the expense of employment and real GDP growth. D) It encourages a focus on real GDP growth at the expense of employment and of inflation. E) The policy control rests in the hands of civil servants rather than in the hands of elected officials.

C

43)In a situation of inflationary pressure, an increase in the overnight loans rate results in A) an increase in real GDP, but a fall in the price level. B) an increase in real GDP and the price level. C) a fall in the price level and real GDP. D) an increase in real GDP, but no change in the price level. E) a rise in the price level, but no change in real GDP.

C

50)If Canadian interest rates rise, the exchange rate value of the dollar ________ and net exports ________. A) falls; increase B) rises only if the U.S. interest rates fall concurrently; decrease C) rises; decrease D) falls; decrease E) rises; increase

C

55)When the Bank of Canada lowers the overnight loans rate, the Canadian interest rate differential ________ and the Canadian dollar ________ on the foreign exchange market. A) rises; appreciates B) rises; depreciates C) falls; depreciates D) falls; changes to equal the value of the U.S. dollar E) falls; appreciates

C

64)In the short run, lowering the overnight loans rate shifts the ________ curve ________ and ________ real GDP. A) aggregate demand; leftward; decreases B) short-run aggregate supply; rightward; increases C) aggregate demand; rightward; increases D) aggregate demand; leftward; increases E) long-run aggregate supply; rightward; increases

C

70)If the Bank of Canada is concerned with inflation it will ________ the overnight loans rate to ________. A) lower; decrease aggregate demand B) raise; increase potential GDP C) raise; decrease aggregate demand D) lower; increase aggregate demand E) raise; increase aggregate demand

C

71)If the Bank of Canada fears inflation it will undertake an open market ________ of securities, the overnight loans rate will ________ and the long-term real interest rate will ________. A) sale; rise; fall B) purchase; fall; rise C) sale; rise; rise D) purchase; rise; fall E) sale; fall; fall

C

11)All of the following statements are true except A) the Bank of Canada's target is to keep the trend CPI inflation at 2 percent a year. B) between 1995 and 2000, the core CPI inflation rate and the CPI inflation rate followed the same trends. C) the core inflation rate excludes the eight most volatile elements of the overall CPI inflation rate. D) the inflation-control target uses the core CPI inflation rate. E) since 2000, the core inflation rate has run at about 0.5 percent a year below the overall CPI inflation rate. 2

D

14)How can the Bank of Canada use the bank rate to regulate the overnight loans rate? 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 overnight loans rate is set at 25 basis points above the bank rate. D) The bank rate is set at the target overnight rate plus 0.25 percentage points. E) 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

49)If the Bank of Canada lowers the overnight loans rate, the exchange rate ________, imports ________, and exports ________. A) rises; increase; increase B) falls; increase; decrease C) falls; decrease; decrease D) falls; decrease; increase E) rises; increase; decrease

D

52)The ripple effects that occur when the Bank of Canada sells securities in the open market include ________. A) an increase in short-run aggregate supply B) an increase in net exports C) a decrease in short-run aggregate supply D) a decrease in consumption expenditure and investment E) a decrease in short-run interest rates 10

D

53)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 ________. A) buy; falls; rises B) buy; rises; falls C) sell; falls; falls D) buy; rises; rises E) sell; rises; falls

D

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

D

61)When the Bank of Canada fights recession by implementing an open market operation, the supply of loanable funds curve shifts ________ and the aggregate demand curve shifts ________. A) rightward; leftward B) rightward and the demand for loanable funds curve shifts rightward; rightward C) leftward; rightward D) rightward; rightward E) leftward; leftward

D

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

D

68)In response to an inflationary gap, the Bank of Canada A) raises the overnight loans rate by buying securities. B) waits until the price level falls before acting. C) lowers the overnight loans rate by buying securities. D) raises the overnight loans rate by selling securities. E) lowers the overnight loans rate by buying securities.

D

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

D

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

D

13)What is the overnight loans rate? A) The volume of loans that take place during the night. B) The interest rate that the Bank of Canada charges chartered banks. C) The percentage change in the volume of loans that take place overnight. D) The interest rate that the Bank of Canada pays when it buys securities from chartered banks. E) The interest rate on loans that members of the Large Value Transfer System make to each other.

E

17)A targeting rule is a monetary policy rule that sets the policy instrument A) based on the current state of the economy. B) at a rate counter-cyclical to the current inflation rate C) based on the overnight loans rate. D) at the discretion of the monetary authority. E) at a level that makes the forecast of the policy target equal to the target. 3

E

20)The policy tools used by the Bank of Canada include A) prime rate and bank rate. B) open market operations and prime rate. C) the exchange rate and open market operations. D) prime rate and the exchange rate. E) the operating band and open market operations.

E

22)An open market operation A) refers to the Bank of Canada's sales and purchases of corporate stock. B) refers to loans made by the Bank of Canada to chartered banks. C) refers to the purchase or sale of Canadian currency in exchange for foreign currency. D) can change bank deposits but cannot alter the quantity of money. E) is the purchase or sale of government of Canada securities by the Bank of Canada from or to a chartered bank or the public.

E

23)The bank rate is the interest rate A) banks charge their very best loan customers. B) banks pay on term deposits. C) the Bank of Canada pays on reserves held by banks. D) received for holding Government of Canada Treasury Bills. E) the Bank of Canada charges when it lends reserves to LVTS -participating banks. 4

E

25)The Bank of Canada can lower the overnight loans rate by A) raising the bank rate. B) lowering the bank rate. C) raising the settlement balances rate. D) lowering the settlement balances rate. E) both B and D.

E

26)The sale of government bonds by the Bank of Canada A) increases the banks' loans to the public. B) increases bank reserves. C) increases the quantity of money. D) lowers interest rates. E) decreases bank reserves.

E

27)The purchase of government bonds by the Bank of Canada A) tightens credit conditions. B) decreases the price of bonds. C) fights inflation. D) decreases bank reserves. E) increases bank loans.

E

3)Which of the following benefits flow from the application of an inflation-control target? A) The monetary authorities can change the target range whenever they feel it is appropriate. B) If actual inflation exceeds the target range, the Bank of Canada can induce a recession to correct the matter. C) People can make decisions with an understanding that inflation rates will remain relatively low. D) Financial market traders have a clearer understanding of the Bank of Canada's intentions. E) Both C and D.

E

33)The overnight rate is determined by equilibrium in the market for ________. The overnight rate ________. A) loanable funds; equals the real interest rate minus the inflation rate B) reserves; equals the real interest rate minus the inflation rate C) money; equals the real interest rate D) loanable funds; equals the real interest rate E) reserves; is the rate that sets the quantity of reserves demanded equal to the quantity of reserves supplied

E

35)Which of the following quotations correctly describes the impact of monetary policy on the economy? A) "The tightening of money growth is helping sell goods abroad." B) "Businesses are investing more, now that monetary policy has become less expansionary." C) "House sales are down lots, due to the higher money growth." D) "The extra money pumped into the economy by the central bank is creating less exports." E) "The extra money pumped into the economy by the central bank is creating more jobs."

E

38)To lower interest rates, the Bank of Canada can A) raise the exchange rate. B) raise the bank rate. C) increase the treasury bill rate. D) decrease bank reserves. E) buy government securities.

E

47)If the Bank of Canada buys government securities in the open market, the supply curve of real money shifts A) rightward and the overnight rate remains constant because the demand for money increases at the same time. B) rightward and the overnight rate rises. C) leftward and the overnight rate falls. D) leftward and the overnight rate rises. E) none of the above.

E

54)If the Bank of Canada lowers the overnight loans rate, A) other short-term interest rates fall. B) other short-term interest rates rise. C) the exchange rate falls. D) the long-term interest rate falls. E) A, C and D are correct.

E

56)If the Bank of Canada lowers the overnight loans rate, other short -term interest rates ________ and the exchange rate ________. A) fall; does not change B) fall; rises C) do not change; falls D) fall, and the long-term interest rate rises; falls E) fall; falls

E

58)A decrease in the overnight loans rate A) decreases the demand for loanable funds, lowers the real interest rate, and decreases aggregate demand. B) lowers the exchange rate, increases the demand for loanable funds, and increases aggregate demand. C) increases other short-term interest rates, decreases investment, and decreases aggregate demand. D) lowers other short-term interest rates, raises the real interest rate, and increases aggregate demand. E) lowers the exchange rate, increases the supply of loanable funds, and increases aggregate demand.

E

59)A decrease in the overnight loans rate leads to A) an increase in consumption expenditure. B) a fall in the exchange rate. C) an increase in exports. D) an increase in the quantity of money. E) all of the above.

E

69)If the Bank of Canada wants to eliminate an inflationary gap, which of the following would be an appropriate policy? A) Decease the government budget deficit. B) Lower the exchange rate. C) Lower the overnight loans rate. D) Buy government securities. E) Raise the overnight loans rate. 13

E

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

E

76)A monetary policy aimed at increasing domestic expenditure will A) have no impact on interest rates, but increase the exchange rate. B) decrease interest rates and increase the exchange rate. C) have no impact on interest rates nor on the exchange rate. D) increase interest rates and decrease the exchange rate. E) decrease interest rates and the exchange rate.

E