M&B Chapter 16
If the Bank of Canada pays on deposits to LVTS participants an interest rate of 3.5 percent then the operating target of the Bank's monetary policy is ________. A) 3.75 percent B) 4 percent C) 3.25 percent D) 3 percent
Answer: A
If the Bank of Canada wants to relieve undesired upward pressure on the overnight interest rate it will enter into a ________. A) Special Purchase and Resale Agreement B) Sale and Repurchase Agreement C) Swap D) Reverse Repo
Answer: A
If the Bank of Canada wants to temporarily inject reserves in the banking system, it will engage in ________. A) a repurchase agreement B) a "swap" transaction C) a reverse repurchase agreement D) None of the above.
Answer: A
If the operating target of the Bank of Canada is 4 percent then the bank rate is ________. A) 4.25 percent B) 4.50 percent C) 3.5 percent D) 4 percent
Answer: A
If the operating target of the Bank of Canada is 4.5 percent then the bank rate is ________. A) 4.75 percent B) 5.25 percent C) 4.25 percent D) 4.5 percent
Answer: A
In the market for reserves, market equilibrium occurs where the ________. A) quantity of reserves demanded equals the quantity supplied B) quantity of reserves demanded is above the quantity supplied C) quantity of reserves demanded is below the quantity supplied D) quantity of reserves demanded does not equal the quantity supplied
Answer: A
In the market for settlement balances, when the overnight interest rate is below the bank rate and above the bank rate less 50 basis points, the supply curve of reserves is ________. A) vertical B) horizontal C) positively sloped D) negatively sloped
Answer: A
It is the ________ assumption of ________ that allows for the transmission between nominal and real interest rates. A) new Keynesian; sticky prices B) monetarist; sticky prices C) new Keynesian; perfect markets D) Bank of Canada; chartered banks allegiance to Canadian monetary policy
Answer: A
Monetary conditions are impacted by ________. A) short-term interest rates and the foreign exchange rate B) open market operations and the prime rate C) the foreign exchange rate and the inflation rate D) the Department of Finance
Answer: A
SPRAs and SRAs are ________ open market operations. A) temporary B) permanent C) risky D) conducted 8 times a year
Answer: A
The overnight rate is important because it is ________. A) the primary indicator of the Bank of Canada's stance on monetary policy B) the interest rate paid on federal debt C) the interest rate charged on government loans D) A and C only.
Answer: A
A repo is a ________. A) Resale Agreement B) Purchase and Resale Agreement C) Swap D) Repo
Answer: B
Quantitative easing is regarded as ________. A) the price of liquidity B) a high-risk monetary policy tool C) a low-risk monetary policy tool D) a desired policy
Answer: B
Sale and Repurchase Agreements ________. A) relieve undesired upward pressure on the overnight interest rate B) alleviate undesired downward pressure on the overnight financing rate C) relieve undesired downward pressure on the overnight interest rate D) alleviate undesired volatility in the overnight financing rate
Answer: B
The Bank of Canada ________ conducting open market operations in Government of Canada treasury bills and bonds in 1994. A) started B) stopped C) continued D) implemented
Answer: B
The Bank of Canada most common operations have been repurchase transactions with ________. A) stockbrokers B) primary dealers C) the public D) other central banks
Answer: B
The Bank of Canada will engage in a repurchase agreement when it wants to ________ reserves ________ in the banking system. A) increase; permanently B) increase; temporarily C) decrease; temporarily D) decrease; permanently
Answer: B
The Bank of Canada neutralizes SRA operations so as to ________. A) not to leave the system in a surplus position at the end of the day B) to leave the system in a surplus position at the end of the day C) as not to leave the system in a deficit position at the end of the day D) as to leave the system in a deficit position at the end of the day
Answer: C
The Bank of Canada will engage in a sale and repurchase agreement when it wants to ________ reserves ________ in the banking system. A) increase; permanently B) increase; temporarily C) decrease; temporarily D) decrease; permanently
Answer: C
The Bank of Canada's lender-of-last-resort function ________. A) is no longer necessary due to CDIC insurance B) has proven to be ineffective C) is needed to prevent runs by large-denomination depositors D) A and B only.
Answer: C
If LVTS participating financial institutions have insufficient settlement balances ________. A) they can borrow from each other in the pre-settlement trading period at the bank rate B) they can borrow from each other in the pre-settlement trading period at the overnight rate C) they can borrow from the Bank of Canada D) B and C only.
Answer: D
If the Bank of Canada wants to alleviate undesired downward pressure on the overnight financing rate it will enter into a ________. A) Purchase and Resale Agreement B) Repurchase Agreement C) Swap D) Reverse Repo
Answer: D
If the operating band for the overnight interest rate is from 3.5 to 4.0 percent, then ________. A) the bank rate is 4.0 percent B) the bank rate is the lower limit of the operating band C) the bank rate is the rate the Bank of Canada charges LVTS participants with negative settlement balances at the end of the banking day D) A and C only.
Answer: D
The Bank of Canada's repurchase transactions are an advantage because ________. A) they occur at the initiative of the Bank of Canada B) the bank has complete control over the volume C) they are monopolized by the Bank of Canada D) A and B only.
Answer: D
The opportunity cost of holding excess reserves is ________. A) the bank rate B) the prime rate C) the treasury bill rate D) the overnight rate
Answer: D
The overnight interest rate ________. A) is the shortest-term rate available B) forms the base of any term structure of interest rates relation C) is the rate the Bank of Canada charges LVTS participants with negative settlement balances at the end of the banking day D) A and B only.
Answer: D
The overnight rate is ________. A) the interest rate on loans from the Bank of Canada B) also know as the Bank rate C) the rate banks give their best customers D) the interest rate on loans of reserves from one bank to another
Answer: D
The quantity of reserves demanded rises when the ________. A) bank rate rises B) bank rate falls C) overnight funds rate rises D) overnight rate falls
Answer: D
Explain the Bank of Canada's open market operations? What are SPRAs and SRAs? How are they used to impact the overnight rate?
Answer: SPRA is special Purchase and Resale Agreement and SRA is a Sale and Repurchase Agreement. SPRAS are used to relieve undesired upward pressure on the overnight interest rate. SRAs alleviated undesired downward pressure on the overnight financing rate. Both are temporary measures.
If the Bank of Canada charges for negative settlement balances to LVTS participants an interest rate of 3.5 percent then the operating target of the Bank's monetary policy is ________. A) 3.25 percent B) 3.75 percent C) 3 percent D) 4 percent
Answer: A
If the Bank of Canada expects the economy to slow down, it ________ the operating band for the overnight interest rate. A) lowers B) raises C) leaves unchanged D) stabilizes
Answer: A
If the Bank of Canada pays on deposits to LVTS participants an interest rate of 3.5 percent then the bank rate is ________. A) 4 percent B) 3.75 percent C) 3.25 percent D) 4.5 percent
Answer: A
The Bank of Canada's operating band is ________ basis points or ________. A) 50; 0.5 percent B) 100; 1 percent C) 50; 5 percent D) 100; 10 percent
Answer: A
If government deposits at the Bank of Canada are predicted to decrease the Bank will offset the transaction through LVTS transfers to ________ settlement balances. A) increase B) decrease C) flood D) inject
Answer: B
If government deposits at the Bank of Canada are predicted to increase, the Bank will offset the transaction through government debt auctions to ________ settlement balances. A) decrease B) increase C) inflate D) drain
Answer: B
If the Bank of Canada expects the economy to to be exceeding its capacity, it ________ the operating band for the overnight interest rate. A) lowers B) raises C) leaves unchanged D) stabilizes
Answer: B
What are the advantages of SPRAs and SRAs?
Answer: 1. The Bank of Canada has complete control over them as they occur at the initiative of the Bank of Canada. 2. They are flexible and precise; together with the Bank's standing facilities they can be used to any extent. 3. They are easily reversed. 4. They can be implemented quickly.
45 basis points is equal to ________. A) 0.45 percent B) 0.045 percent C) 4.5 percent D) 45 percent
Answer: A
A standing lending facility is ________. A) the facility at which banks can borrow reserves from the Bank of Canada B) a temporary lending facility C) a permanent lending facility D) a daily lending facility
Answer: A
Although transactions in the LVTS account for less than ________ of the total number of transactions, they account for about ________ of the value of transactions. A) 1 percent; 94 percent B) 5 percent; 90 percent C) 10 percent; 85 percent D) 20 percent; 80 percent
Answer: A
At the end of each banking day, each LVTS participant must bring its settlement balance with the Bank of Canada ________. A) close to zero B) to a positive balance C) to a negative balance D) to at least $1 million
Answer: A
Changes to the operating band are announced by the Bank of Canada ________ times a year. A) eight B) six C) four D) two
Answer: A
Core CPI excludes ________. A) volatile components B) headline items C) indirect taxes D) energy costs
Answer: A
If government deposits at the Bank of Canada are predicted to decrease, the Bank will offset the transaction through government deposit auctions to ________ settlement balances. A) decrease B) increase C) inject D) resupply
Answer: A
If government deposits at the Bank of Canada are predicted to increase, the manager of the trading desk at the Bank will likely conduct activities to ________ reserves. A) inject B) drain C) reverse D) flood
Answer: A
If the Bank of Canada pays on deposits to LVTS participants an interest rate of 3.5 percent then the operating target of the Bank's monetary policy is ________ and the bank rate is ________. A) 3.75 percent; 4 percent B) 4 percent; 4.25 percent C) 3.25 percent; 3.5 percent D) 3 percent; 3.25
Answer: A
The Bank of Canada neutralizes government receipts by ________. A) arranging an increase in government deposit auctions B) leaving the system in a surplus position at the end of the day C) reducing the banking system's settlement balances D) leaving the system in a deficit position at the end of the day
Answer: A
The Bank of Canada neutralizes special PRA operations so as to ________. A) not to leave the system in a surplus position at the end of the day B) to leave the system in a surplus position at the end of the day C) to leave the system changed at the end of the day D) as to leave the system in a deficit position at the end of the day
Answer: A
The Bank of Canada uses the ________ as its operating instrument. A) nominal interest rate B) real interest rate C) open market operations D) federal funds rate
Answer: A
The LVTS was put in place in order to eliminate the ________. A) systemic risk B) principal-agent problem C) moral hazard problem D) credit risk
Answer: A
The facility at which banks can borrow reserves from the Bank of Canada is called the ________. A) standing lending facility B) temporary lending facility C) permanent lending facility D) daily lending facility
Answer: A
The market equilibrium, in which the quantity of reserves demanded equals the quantity of reserves supplied ________. A) determines the overnight rate B) occurs at the intersection of the vertical supply curve and the demand curve at the Bank of Canada's target level of reserves C) determines the interest rate charged on loans of these reserves D) All of the above.
Answer: A
The operating band for the overnight interest rate is ________. A) 50 basis points wide B) defines the rate of interest the Bank of Canada charges LVTS participants with negative settlement balances at the end of the banking day C) defines the rate of interest the Bank of Canada pays LVTS participants with negative settlement balances at the end of the banking day D) A and B only.
Answer: A
The overnight market in Canada is ________ with a ________ range of participants. A) very liquid; broad B) very liquid; narrow C) not very liquid; broad D) not very liquid; narrow
Answer: A
To keep inflation from falling below the target range, the Bank of Canada ________. A) decreases the target for the overnight rate which causes the dollar to go down B) decreases the target for the overnight rate which causes the dollar to go up C) increases the target for the overnight rate which causes the dollar to go down D) increases the target for the overnight rate which causes the dollar to go up
Answer: A
Where only the net credit or debit position of each participant vis-à-vis all other participants is calculated is known as ________. A) multilateral netting B) principal-agent netting C) moral hazard netting D) credit risk netting
Answer: A
Explain why the bank rate is an upper limit for the overnight rate.
Answer: Anytime the overnight rate is below the bank rate, banks are going to borrow money from each other in order to minimize their settlement balances with the bank of Canada. When the overnight rate starts to rise and exceeds the bank rate, then banks will be able to borrow as many funds as they require from the Bank of Canada by being charged the bank rate instead of the overnight rate that is now higher. Thus the bank rate is a ceiling for the overnight rate.
A reverse repo is a ________. A) Special Purchase and Resale Agreement B) Sale and Repurchase Agreement C) Swap D) Repo
Answer: B
If the Bank of Canada wants to alleviate undesired downward pressure on the overnight financing rate it will enter into a ________. A) Special Purchase and Resale Agreement B) Sale and Repurchase Agreement C) Swap D) Repo
Answer: B
If the Bank of Canada wants to temporarily drain reserves from the banking system, it will engage in ________. A) a repurchase agreement B) a sale and repurchase agreement C) a "pump" agreement D) None of the above.
Answer: B
In Canada, the market for settlement balances (reserves) is where ________. A) the federal funds rate is determined B) the overnight interest rate is determined C) the discount rate is determined D) LIBOR is determined
Answer: B
In addition to targeting the overnight interest rate at the mid-point of the operating band, the Bank of Canada also targets ________. A) the prime rate B) the level of settlement balances C) the treasury bill rate D) the money multiplier
Answer: B
The Bank of Canada will engage in a repurchase and resale agreement when it wants to ________ reserves ________ in the banking system. A) increase; permanently B) increase; temporarily C) decrease; temporarily D) decrease; permanently
Answer: B
The goal of the Bank of Canada's current monetary policy is to keep the inflation rate within a target range of ________. A) 2 percent to 3 percent B) 1 percent to 3 percent C) 1 percent to 4 percent D) 2 percent to 4 percent
Answer: B
A rise in the overnight rate ________. A) decreases the opportunity cost of holding desired reserves B) lowers the opportunity cost of holding desired reserves C) increases the opportunity cost of holding excess reserves D) lowers the opportunity cost of holding excess reserves
Answer: C
LVTS participants with positive settlement balances at the end of the day ________. A) are paid the bank rate B) are paid the overnight rate C) are paid the bank rate less 50 basis points D) are paid the prime rate
Answer: C
One of the Bank of Canada's most important roles is to be ________. A) the Federal government's banker B) the issuer of government debt C) a lender-of-last-resort D) a regulator of banks
Answer: C
Quantitative easing is regarded as an unconventional form of monetary policy because it targets the ________. A) the price of liquidity B) the overnight interest rate C) the amount of liquidity provided by the central bank instead of targeting the price of liquidity D) settlement balances
Answer: C
The Automated Clearing Settlement System (ACSS) ________. A) is the core of the Canadian payments system B) is an electronic net settlement network designed to provide settlement to wholesale transactions C) is an electronic net settlement network designed to provide settlement to paper-based payment items D) A and B only.
Answer: C
The Automated Clearing Settlement System (ACSS) ________. A) was introduced on February 4, 1999 B) is an electronic net settlement network designed to provide settlement to wholesale transactions C) aggregates interbank payments and informs the Bank of Canada of the net amounts to be transferred from and to each participant's settlement account with the Bank of Canada D) A and B only.
Answer: C
The channel/corridor system for setting interest rates ________. A) is not appropriate for Canadian monetary policy B) limits the amount banks can borrow from the central bank C) enables the central bank to set the overnight, policy rate D) is being phased out as a monetary policy tool
Answer: C
The lower limit of the operating band for the overnight interest rate defines ________. A) the bank rate B) the prime rate C) the rate the Bank of Canada pays LVTS participants with positive settlement balances at the end of the banking day D) the rate the Bank of Canada charges LVTS participants with negative settlement balances at the end of the banking day
Answer: C
The overnight interest rate is also known as the ________. A) the bank rate B) the policy rate C) reference rate D) the growth rate of M2
Answer: C
The rate spread at the Bank of Canada for LVTS balances is ________. A) 300 basis points B) 200 basis points C) 50 basis points D) 25 basis points
Answer: C
If LVTS participating financial institutions have insufficient settlement balances ________. A) they can borrow from each other in the pre-settlement trading period B) they can borrow from the Bank of Canada C) they can borrow from the Bank of Canada at the prime rate D) A and B only.
Answer: D
If the Bank of Canada wants to relieve undesired upward pressure on the overnight interest rate it will enter into a ________. A) Resale Agreement B) Sale and Repurchase Agreement C) Swap D) Repo
Answer: D
The interest rate on loans of reserves from one bank to another is ________. A) the bank rate B) the fed funds rate C) the discount rate D) the overnight rate
Answer: D
The lower limit of the operating band for the overnight interest rate is ________. A) the bank rate B) the prime rate C) the rate the Bank of Canada charges LVTS participants with negative settlement balances at the end of the banking day D) 50 basis points below the bank rate
Answer: D
When the Bank of Canada lowers the operating band for the overnight interest rate, it ________. A) lowers the bank rate by the same amount B) encourages LVTS participants to borrow reserves either from each other or from the Bank of Canada C) it reduces the monetary base and ultimately the money supply D) A and B only.
Answer: D
When the overnight rate is up to 50 basis points below the bank rate ________. A) the supply curve of settlement balances has a positive slope B) the demand curve for settlement balances is vertical C) the demand curve for settlement balances is horizontal D) the demand curve for settlement balances has a negative slope
Answer: D
What is the service provided by the LVTS? why is it important?
Answer: The LVTS is an electronic, real-time net settlement network, designed to provide immediate finality and settlement to time-critical transactions. There are fourteen LVTS participants and all other members of the Canadian Payments Association are able to arrange LVTS payments for their clients through the LVTS participants. The importance of the LVTS is that it eliminates systemic risk—the risk to the entire payments system due to the inability of one financial institution to fulfill its payment obligations in a timely fashion.
What are the advantages and disadvantages of the Bank's lending policy?
Answer: The most important advantage is that the Bank can use it to perform its role of lender of last resort. But it is less effective compared to open market operations for two reasons. Open market buyback operations are completely at the discretion of the Bank of Canada, whereas the volume of normal advances is not. The Bank can change the bank rate but in the current channel/corridor system can't make banks borrow. In addition, open market buyback operations are more easily reversed than changes in Bank lending policy.
Explain why the bank rate minus 50 basis points (ib-50) is the lower limit for the overnight rate.
Answer: When demand for reserves falls and the overnight rate tends to fall below the ib-50 rate, then the banks with excess reserves are better off leaving their credit (positive) balances with the LVTS where they will get an interest rate of ib-50. Thus the overnight interest rate can never fall below this point.
Multilateral netting is ________. A) the netting of the credit or debit position of each participant vis-à-vis all other participants B) an electronic net settlement network designed to provide settlement to paper-based payment items C) the netting of the forward position of LVTS participants D) None of the above.
Answer: A
Special Purchase and Resale Agreements ________. A) relieve undesired upward pressure on the overnight interest rate B) alleviate undesired downward pressure on the overnight financing rate C) relieve undesired downward pressure on the overnight interest rate D) alleviate undesired volatility in the overnight financing rate
Answer: A
The ACSS is operated by the ________. A) Canadian Payments Association B) Bank of Canada C) Ministry of Finance D) LVTS
Answer: A
The purchase of financial assets by the central bank through the creation of excess reserves for banks is known as ________. A) quantitative easing B) conditional statements about the future path of the policy rate C) interest rate expectations D) credit easing
Answer: A
The risk to the entire payments system due to the inability of one financial institution to fulfill its payment obligations in a timely fashion is known as ________. A) systemic risk B) the principal-agent problem C) moral hazard D) credit risk
Answer: A
The primary indicator of the Bank of Canada's stance on monetary policy is ________. A) the bank rate B) the overnight rate C) the growth rate of the monetary base D) the growth rate of M2
Answer: B
The target for settlement balances is set at ________. A) zero with no adjustments for any pressures on the overnight rate B) zero but the Bank makes adjustments depending on pressures on the overnight rate C) zero but the Bank makes adjustments depending on pressures on the prime rate D) always positive with no adjustments
Answer: B
The target for the overnight interest rate is also known as the ________. A) the bank rate B) the policy rate C) reference rate D) the growth rate of M2
Answer: B
If the operating band for the overnight interest rate is from 3.5 to 4.0 percent, then ________. A) the rate on positive settlement balances at the Bank of Canada is 3.5 percent B) the rate on positive settlement balances at the Bank of Canada is the lower limit of the operating band C) the bank rate is the lower limit of the operating band D) A and B only.
Answer: D
Large Value Transfer System (LVTS) participants can make a payment only if they ________. A) have positive settlement balances in their accounts with the Bank of Canada B) have posted collateral (such as Government of Canada treasury bills and bonds) C) have explicit lines of credit with other participants D) All of the above.
Answer: D
Standing facilities ________. A) refers to participant borrowing form each other to bring their settlement balances to zero at the end of the banking day B) refers to the Bank of Canada refusal to lend to or borrow from a participant to bring their settlement balances to zero at the end of the banking day C) refers to the Bank of Canada's building in Ottawa D) refers to the Bank of Canada being ready to lend to or borrow from a participant to bring their settlement balances to zero at the end of the banking day
Answer: D
The Large Value Transfer System (LVTS) ________. A) is the core of the Canadian payments system B) is an electronic net settlement network designed to provide settlement to wholesale transactions C) is an electronic net settlement network designed to provide settlement to paper-based payment items D) A and B only.
Answer: D
The Large Value Transfer System (LVTS) ________. A) was introduced on February 4, 1999 B) is the core of the Canadian payments system C) is an electronic net settlement network designed to provide settlement to paper-based payments items D) A and B only.
Answer: D
What is the function of the ACSS?
Answer: The ACSS is an electronic payments system operated by the Canadian Payments Association. The ACSS aggregates interbank payments from non-LVTS paper-based payment items such as cheques, travellers' cheques, gift certificates and money orders, and transfers the net amounts from and to each participant's settlement account with the Bank of Canada. The Bank completes the settlement the next day through the LVTS.
What is the operating band for the overnight interest rate?
Answer: The Bank of Canada implements monetary policy by changing the overnight interest rate in order to influence other short-term interest rates and the exchange rate. The Bank's operational objective is to keep the overnight rate within a band of 50 basis points. Early in the morning (9:00 am) on each of the eight specified dates within the year the Bank announces an operating band of 50 basis points for the overnight rate.
