ECON 345 Final
78. Changes to the operating band are announced by the Bank of Canada ________ times a year. A) eight B) six C) four D) two
A) eight
70. 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
A) systemic risk
31. Of the three players in the money supply process, most observes agree that the most important player is _____. A) the Bank of Canada B) the Department of Finance C) the Canada Customs and Revenue Agency D) the House of Parliament
A) the Bank of Canada
88. In the market for settlement balances, when the overnight interest rate is below the bank rate and above the bank rate less 50 basis ____________. A) vertical B) horizontal C) positively sloped D) negatively sloped
A) vertical
34. Both ________ and _________ are monetary liabilities of the Bank. A) government securities; advances to banks B) notes in circulation; reserves C) government securities; reserves D) notes in circulation; advances to banks
B) notes in circulation; reserves
97. 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
B) raises
66. If the desired reserve ratio is ten percent, currency in circulation is $400 billion, chequable deposits are $1000 billion, and excess reserves total $1 billion, then the currency ratio is ________. A) .25 B) .50 C) .40 D) .05
C) .40
106. 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
C) a lender-of-last-resort
126.Due to the lack of timely data for the price level and economic growth, the Bank of Canada's strategy ________. A) targets the exchange rate, since the Bank of Canada can control this variable B) targets the price of gold, since it is closely related to economic activity C) uses an intermediate target, such as an interest rate D) stabilizes the consumer price index, since the Bank of Canada can control the CPI
C) uses an intermediate target, such as an interest rate
67. Recognizing the distinction between advances to banks and the nonborrowed monetary base, the money supply model is specified as ________. A) M = m × (MBn - BR) B) M = m × (MBn + BR) C) M = m + (MBn - BR) D) M = m - (MBn + BR)
M = m × (MBn + BR)
56. A bank has excess reserves of $10000 and demand deposit liabilities of $100,000 when the desired reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent the bank's excess reserves will be ________. A) -$5000 B) -$1000 C) $1000 D) $5000
d) $5000
101. A reverse repo is a ________. A) Special Purchase and Resale Agreement B) Sale and Repurchase Agreement C) Swap D) Repo
B) Sale and Repurchase Agreement
58. The money supply is __________ related to the nonborrowed monetary base, and _________ related to the level of borrowed reserves. A) positively; negatively B) negatively; not C) positively; positively D) negatively; negatively
C) positively; positively
114. Interest rate stability is desirable because ________. A) fluctuations in interest rates create uncertainty B) it leads to financial market stability C) stability in the foreign exchange markets D) all of the above
D) all of the above
77. 45 basis points is equal to ________. A) 0.45 percent B) 0.045 percent C) 4.5 percent D) 45 percent
A) 0.45 percent
71. 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
A) 1 percent; 94 percent
80. 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
A) 3.75 percent
62. If the money supply is equal to $400 billion and the monetary base is equal to $100 billion, the money multiplier is equal to _____, A) 4 B) 0.25 C) 5 D) cannot be determined
A) 4
113. Current estimates of NAIRU place it between ________ and ________. A) 4 percent; 6 percent B) 4 percent; 20 percent C) 1 percent; 3 percent D) 1 percent; 4 percent
A) 4 percent; 6 percent
79. 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
A) 4.25 percent
63. When the monetary base is equal to $200 billion, the desired reserve ratio is 0.10 and the currency ratio is equal to 0.20, the money multiplier is equal to ________ and the money supply is equal to ________. A) 4; $800 billion B) 3.67; $734 billion C) 4; $734 billion D) 3.67; $800 billion
A) 4; $800 billion
125. Which of the following is a potential operating instrument for the central bank? A) The monetary base B) The M1 money supply C) GDP D) The Bank rate
A) The monetary base
102. 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.
A) a repurchase agreement
82. 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
A) close to zero
38. The monetary base minus reserves equals ________ A) currency in circulation B) the borrowed base C) the nonborrowed base D) advances to banks
A) currency in circulation
98. 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
A) decreases the target for the overnight rate which causes the dollar to go down
41. When the Bank of Canada purchases a government bond from a bank, reserves in the banking system ___________, and the monetary base __________, everything else held constant. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases
A) increase; increases
117. In the long-run, there is no trade-off between ________ and ________. A) inflation; unemployment B) inflation; price stability C) unemployment; price stability D) unemployment; economic growth
A) inflation; unemployment
112. The natural rate of unemployment ________. A) is consistent with full employment B) is equal to zero C) equals structural employment D) is the same as frictional employment
A) is consistent with full employment
111. The importance of a nominal anchor is to ________. A) limit the time-inconsistency problem B) reduce inflation C) promote low inflation D) allow discretionary day-to-day monetary policy
A) limit the time-inconsistency problem
95. 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
A) lowers
96. 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
A) nominal interest rate
119. Concerns about a dual mandate include ________. A) over expansionary policy B) policies that lead to large output fluctuations C) time-inconsistency problems D) decreases in output and unemployment
A) over expansionary policy
116. Hierarchical mandates ________. A) puts the goal of price stability first and then allows for other goals B) requires all goals to be met simultaneously C) is only used by the Bank of Canada D) is only used by the Federal Reserve
A) puts the goal of price stability first and then allows for other goals
107. 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
A) quantitative easing
92. 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
A) quantity of reserves demanded equals the quantity supplied
99. 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
A) relieve undesired upward pressure on the overnight interest rate
42. Suppose your payroll cheque is directly deposited to your chequing account. Everything else held constant, total reserves in the Banking system ________ and they monetary base _________. A) remain unchanged; remains unchanged B) remain unchanged; increases C) decrease; increases D) decrease; decreases
A) remain unchanged; remains unchanged
37. The Monetary base minus currency in circulation equals ______. A) reserves B) the borrowed base C) the nonborrowed base D) advances to banks
A) reserves
69. 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
A) systemic risk
64. If the desired reserve ratio is ten percent, currency in circulation is $400 billion, chequable deposits are $800 billion, and excess reserves total $0.8 billion, then the money supply is A) $8000 billion B) $1200 billion C) $120 billion D) $8400 billion
B) $1200 billion
65. If the desired reserve ratio is ten percent, currency in circulation is $400 billion, chequable deposits are $800 billion, and excess reserves total $0.8 billion, then the monetary base is ________. A) $480 billion B) $480.8 billion C) $80 billion D) $80.8 billion
B) $480.8 billion
94. 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
B) 1 percent to 3 percent
108. 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
B) a high-risk monetary policy tool
103. 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.
B) a sale and repurchase agreement
100. 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
B) alleviate undesired downward pressure on the overnight financing rate
36. When banks borrow money from the Bank of Canada, these funds are called _________. A) Bank funds B) borrowed reserves C) Bank loans D) overnight funds
B) borrowed reserves
61. In the model of the money supply process, the depositor's role in influencing the money supply is represented by ___________. A) only the currency holdings B) both the currency holdings and desired reserves C) the currency holdings, desired reserves, and borrowed reserves D) only desired reserves
B) both the currency holdings and desired reserves
110. The Bank of Canada commitments regarding the operating band for the overnight interest rate to align market expectations of future short-term interest rates with those of the Bank are known as ________. A) quantitative easing B) conditional statements about the future path of the policy rate C) interest rate expectations D) credit easing
B) conditional statements about the future path of the policy rate
39. High-powered money minus reserves equals ____________. A) reserves B) currency in circulation C) the monetary base D) the nonborrowed base
B) currency in circulation
49. An increase in _______ leads to an equal _______ in the monetary base in the short run. A) float; decrease B) float; increase C) advances to banks; decrease D) deposits at the Bank; increase
B) float; increase
52. When the Bank of Canada supplies the banking system with an extra dollar of reserves, deposits _______ by _________ than one dollar-- a process called multiple deposit creation. A) increase; less B) increase; more C) decrease; less D) decrease; more
B) increase; more
60. In the model of the money supply process, the Bank of Canada's role is influencing the money supply is represented by __________. A) both desired reserves and currency holdings B) nonborrowed reserves and borrowed reserves C) only borrowed reserves D) only nonborrowed reserves
B) nonborrowed reserves and borrowed reserves
33. The monetary liabilities of the Bank of Canada include _______. A) government securities and advances to banks B) notes in circulation C) government securities and reserves D) notes in circulation and advances to banks
B) notes in circulation
127. Interest rates are difficult to measure because ________. A) data on them are not available in a timely manner B) real interest rates depend on the hard-to-determine expected inflation rate C) they fluctuate too often to be accurate D) they cannot be controlled by the Bank of Canada
B) real interest rates depend on the hard-to-determine expected inflation rate
46. If a person selling bonds to the Bank of Canada cashes the Bank's cheque, then reserves ____________ and currency in circulation __________, everything else held constant. A) remain unchanged; declines B) remain unchanged; increases C) decline; remains unchanged D) increase; remains unchanged
B) remain unchanged; increases
57. An increase in the nonborrowed monetary base, everything else held constant, will cause ___________. A) the money supply to fall B) the money supply to rise C) no change in the money supply D) demand deposits to fall
B) the money supply to rise
87. 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
B) the overnight interest rate is determined
76. 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
B) the overnight rate
54. The formula for the simple deposit multiplier can be expressed as _________. A) △R = × △T B) △D = × △R C) △r = × △T D) △R = × △D
B) △D = 1/r × △R
53. In the simple deposit expansion model, if the Bank of Canada purchases $100 worth of bonds from a bank that previously had no excess reserves, deposits in the banking system can potentially increase by __________. A) $10 B) $100 C) $100 times the reciprocal of the desired reserve ratio D) $100 times the desired reserve ratio
C) $100 times the reciprocal of the desired reserve ratio
55. If reserves in the banking system increased by $100, then chequable deposits will increase by $667 in the simple model of deposit creation when the desired reserve ratio is _______. A) 0.01 B) 0.05 C) 0.15 D) 0.20
C) 0.15
51. The relationship between borrowed reserves, the nonborrowed monetary base, and the monetary base is _____. A) MB = MBn - BR B) BR = MBn - MB C) BR = MB - MBn D) MB = BR - mn
C) BR = MB - MBn
123.Which of the following is disadvantage of inflation targeting? A) There is simplicity and clarity of the target. B) Inflation targeting does not rely on a stable money-inflation relationship. C) It may lead to larger output fluctuations. D) Inflation targeting reduces the effects of inflation shocks.
C) It may lead to larger output fluctuations.
122. Which of the following is a disadvantage of inflation targeting? A) There is simplicity and clarity of the target. B) Inflation targeting does not rely on a stable money-inflation relationship. C) There is a delayed signal on the achievement of the target. D) Inflation targeting reduces the effects of inflation shocks.
C) There is a delayed signal on the achievement of the target.
35. The interest rate the Bank of Canada charges banks borrowing from the Bank is the ____________. A) overnight rate B) Treasury bill rate C) bank rate D) prime rate
C) bank rate
45. When the Bank of Canada sells $100 worth of bonds to first nations bank, reserves in the banking system ____________. A) increase by $100 B) increase by more than $100 C) decrease by $100 D) decrease by more than $100
C) decrease by $100
104. 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
C) decrease; temporarily
48. When the Bank of Canada calls in a loan from a bank, the monetary base _____ and reserves _______. A) remains unchanged; decrease B) remains unchanged; increase C) decreases; decrease D) decreases; remains unchanged
C) decreases; decrease
93. 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
C) enables the central bank to set the overnight, policy rate
32. Both _________ and ________ are bank of Canada assets. A) notes in circulation; reserves B) notes in circulation; government securities C) government securities; advances to banks D) government securities; reserves
C) government securities; advances to banks
91. 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
C) increases the opportunity cost of holding excess reserves
74. 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.
C) is an electronic net settlement network designed to provide settlement to paper-based payment items
40. Purchases and sales of government securities by the Bank of Canada are called ___________. A) advances to banks B) Bank fund transfers C) open market operations D) swap transactions
C) open market operations
75. 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
C) reference rate
130. According to the Taylor rule, the Bank of Canada should raise the overnight interest rate when inflation ________ the Bank of Canada's inflation target or when real GDP ________ the Bank of Canada's output target. A) rises above; drops below B) drops below; drops below C) rises above; rises above D) drops below; rises above
C) rises above; rises above
59. Everything else held constant, and increase in currency holding will cause A) the money supply to rise B) the money supply to remain constant C) the money supply to fall D) chequable deposits to rise
C) the money supply to fall
50. Subtracting borrowed reserves from the monetary base obtains _______. A) reserves B) high-powered money C) the nonborrowed monetary base D) the borrowed monetary base
C) the nonborrowed monetary base
81. 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
C) the rate the Bank of Canada pays LVTS participants with positive settlement balances at the end of the banking day
105. 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.
D) A and B only.
72. 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.
D) A and B only.
83. 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.
D) A and B only.
86. 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.
D) A and B only.
120. Which of the following is an advantage of inflation targeting? A) There is simplicity and clarity of the target. B) Inflation targeting does not rely on a stable money-inflation relationship. C) It is understood by the public and is transparent. D) All of the above.
D) All of the above.
73. 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.
D) All of the above.
85. 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.
D) B and C only
129. Which of the following criteria must be satisfied when selecting an intermediate target? A) The variable must be measurable and frequently available. B) The variable must be controllable with the use of the central bank's policy tools. C) The variable must have a predictable impact on the policy goal. D) Each of the above.
D) Each of the above
121. Which of the following is an advantage to inflation targeting? A) There is a delayed signal about achievement of the target. B) Inflation targets could impose a rigid rule on policymakers. C) There is potential for larger output fluctuations. D) It increases accountability of the central bank
D) It increases accountability of the central bank.
115. Increases in interest rates ________. A) cause large capital losses B) could lead to bank failures C) affect consumers' willingness to buy houses D) all of the above
D) all of the above
118.Which of the following countries have hierarchical mandates? A) Reserve Bank of New Zealand B) Bank of Canada C) Bank of England D) all of the above
D) all of the above
109. The purchase of private sector assets by the central bank in critical markets is known as ________. A) quantitative easing B) conditional statements about the future path of the policy rate C) managing interest rate expectations D) credit easing
D) credit easing
124. The two types of asset-price bubbles are ________ and ________ bubbles. A) credit-driven; debt driven B) rational; optimistic C) irrational exuberance; optimistic D) credit-driven; irrational exuberance
D) credit-driven; irrational exuberance
43. When the Bank of Canada sells a government bond to a bank, reserves in the Banking system ________ and the monetary base ____________, everything else held constant. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases
D) decrease; decreases
128. When it comes to choosing an policy instrument, both the ________ rate and ________ aggregates are measured accurately and are available daily with almost no delay. A) three-month T-bill; monetary B) three-month T-bill; reserve C) overnight rate; monetary D) overnight rate; reserve
D) overnight rate; reserve
84. 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
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
47. If a member of the nonbank public sells a government bond to the Bank of Canada in exchange for currency, the monetary base will __________, but __________. A) remain unchanged; reserves will fall B) remain unchanged; reserves will rise C) rise; currency in circulation will remain unchanged D) rise; reserves will remain unchanged
D) rise; reserves will remain unchanged
44. The monetary base declines when ___________, A) the Bank extends advances to banks B) deposits at the Bank decrease C) float increases D) the Bank sells securities
D) the Bank sells securities
89. 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
D) the demand curve for settlement balances has a negative slope
68. 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
D) the overnight rate
90. 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
D) the overnight rate
