MACRO1100 W17 CH11

Expansionary monetary policy

The bank of canada decreases interest rates to increase real GDP

Contractionary monetary policy

The bank of canada increases interest rates to reduce inflation

Taylor principle

The principle that central banks should raise nominal intrest rates by more than the increase in inflation so that real intrest rates also increase

Suppose that households became mistrustful of the banking system and decide to decrease their checking accounts and increase their holdings of currency. Using the money demand and money supply model and assuming everything else is held constant, the equilibrium interest rate should

increase.

Using the money demand and money supply model, an increase in money demand would cause the equilibrium interest rate to

increase.

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

increase.

By the 2000s, an important change in the US mortgage market had occurred when ________ became significant participants in the secondary market for mortgages.

investment banks

A financial asset is considered a security if

it can be sold in a secondary market.

An increase in real GDP can shift

money demand to the right and increase the equilibrium interest rate.

The Bank of Canada cannot target both the money supply and the interest rate because it does not control

money demand.

the Bank of Canada cannot achieve a target for both the money supply

and an interest rate at the same time.

The supporters of a monetary growth rule believe that active monetary policy

destabilizes the economy, increasing the number of recessions and their severity.

An increase in the interest rate

increases the opportunity cost of holding money.

By the height of the US housing bubble in 2005 and early 2006, lenders had greatly loosened the standards for obtaining a mortgage loan, with many mortgages being granted to ________ borrowers with flawed credit histories and ________ borrowers who did not document their incomes.

sub-prime; "Alt-A"

The Bank of Canada uses ________ to measure inflation

the consumer price index

An increase in the price level causes

the money demand curve to shift to the right.

Monetarists think that the Bank of Canada should use

the money supply as a target when conducting monetary policy.

The monetary policy target the Bank of Canada focuses primarily on today is

the overnight interest rate.

Most of the pressure for a monetary growth rule has disappeared because since 1980

the relationship between movements in the money supply and movements in real GDP and the price level have become much weaker.

Which of the following describes what the Bank of Canada would do to pursue an expansionary monetary policy?

use open market operations to buy government of Canada bonds

The money market model is essentially

a model that determines the short-term nominal rate of interest.

The ability of the Bank of Canada to use monetary policy to affect economic variables such as real GDP ultimately depends upon its ability to affect

real interest rates.

When the Bank of Canada decreases the money supply, at the previous equilibrium interest rate households and firms will now want to

sell government of Canada securities

The Bank of Canada can increase the overnight interest rate by

selling Canada bonds, which decreases bank reserves.

Monetary Growth rule

A plan for increasing the quantity of money at a fixed rate that does not respond to changes in economic conditions

Symmetric Inflation Targeting

Conducting monetary based on an equal concern about inflation rising above its target as about inflation falling below target

Inflation Targeting

Conducting monetary policy so as to commit the central bank to achieveing a publicly announced inflation level

Flexible Inflation Targeting

Conduction monetary policys that do not rely on mechanical rules but tries to meet the inflation target over some time horizon (typically 2 years)

Troubled Asset Relief Program (TARP)

In october 2008 the congress passed this program under which the US Treasury provided funds to banks in exchange for stock.

An increase in the interest rate causes

a movement up along the money demand curve.

Changes in the overnight interest rate usually result in

changes in both short-term and long-term interest rates with more of an effect on short-term interest rates.

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

decrease.

The money demand curve has a

negative slope because an increase in the interest rate decreases the quantity of money demanded.

With a monetary growth rule as proposed by the monetarists, during a recession the rate of growth of the money supply would

not change.

The Taylor rule links the Bank of Canada's target for the

overnight interest rate to economic variables.

If the Bank of Canada raises or lowers interest rates too late, it could result in a ________ policy that destabilizes the economy.

procyclical