Chapter 12 The Bank of Canada Weekly Assignment PDF

Preview

Summary

Chapter 12 The Bank of Canada Weekly Assignment...

Description

CHAPTER 12: The Bank of Canada 1. What institution is the central bank of Canada? a. the Department of Finance b. the Royal Bank of Canada c. the Bank of Canada d. the Federal Reserve Correct: C 2. Which of the following best describes a nation's central bank? a. It is the largest private bank in the country and makes loans to the different levels of government when needed. b. It is the agency that oversees the banking system and regulates the quantity of money in the economy. c. Its primary function is to make loans to private companies and individuals. d. It conducts the nation's fiscal policy and oversees the government's spending. Correct: B 3. Which of the following are the Bank of Canada's four main areas of responsibility? a. currency, funds management, financial system, monetary policy b. currency, securities management, financial system, fiscal policy c. tariffs, funds management, stock market, monetary policy d. tariffs, securities management, stock market, fiscal policy Correct: A 4. Which of the following best describes the ownership of the Bank of Canada? a. It is privately owned by the chartered banks and was created it to act as a regulatory body for all licensed Canadian financial institutions. b. It is publicly owned by all Canadian citizens as it was created to keep Canadian financial institutions in check. c. The federal government owns it, but it operates independently from the government. d. It is owned by shareholders and the shares are readily available on Canadian stock markets. Correct: C

5. Who is in charge of the operation of the Bank of Canada? a. the governor of the bank b. the federal minister of finance c. the prime minister of Canada d. the operations manager Correct: A 6. Which of the following would be an acceptable inflation rate to the Bank of Canada? a. 0% b. 0.5% c. 2% d. 4% Correct: C 7. Why do chartered banks keep reserves at the Bank of Canada? a. to protect against bankruptcy b. to make payments to each other c. because they are required to by law d. so the Bank of Canada has money to make loans Correct: B 8. What is the Bank of Canada's most important function? a. managing the government's bank accounts b. controlling the money supply c. serving as a "lender of last resort" in order to maintain stability in the financial system d. issuing currency for circulation in Canada Correct: B 9. The basic functions of the Bank of Canada include: a. regulating the bond market. b. ensuring the stability of the exchange rate. c. being a fiscal agent to the federal government. d. providing deposit insurance for Canadian demand deposits.

Correct: C 10. Which of the following is NOT a function of the Bank of Canada? a. limiting the national debt b. managing the federal government's bank accounts c. buying and selling government bonds to control the size and growth rate of the money supply d. controlling inflation Correct: A 11. Which of the following is the Bank of Canada's most important tool to influence the money supply? a. open market operations b. targeting the overnight lending rate c. the exchange rate d. desired reserve ratios [Note: There are NO reserve requirements in Canada]. Correct: B 12. Other things being equal, which of the following is most likely to happen when the Bank of Canada increases the overnight interest rate? a. The money supply tends to increase. b. Banks deposit more money in the Bank of Canada. c. Bank lending tends to increase. d. Consumer savings decrease. Correct: B 13. If the Bank of Canada wanted to target the overnight interest rate at 5 percent, what would it set the bankers' deposit rate at? a. 5.25 percent b. 5.0 percent c. 4.75 percent d. 0 percent Correct: C 14. What are open market operations? a. the purchase and sale of government securities by the Bank of Canada

b. the purchase of foreign currencies and bonds by the Bank of Canada c. the investment of the Bank of Canada's reserves into stocks through publicly traded market systems d. the daily transactions that occur on the stock market Correct: A 15. Suppose the Bank of Canada purchases $10 million worth of T-Bills on the open market with a cheque drawn on the Bank of Canada. The private seller deposits this cheque at a CIBC branch. Further suppose that all commercial banks have a desired reserve ratio of 5 percent and that all commercial banks immediately lend out their excess reserves. How many loans will CIBC make initially and how many potential loans will be made as a result of the Bank of Canada's purchase? a. $0.5 million, and $20 million, respectively b. $9.5 million, and $200 million, respectively c. $5 million, and $0.5 million, respectively d. $20 million, and $9.5 million, respectively Correct: B 16. Suppose the Bank of Canada sold $80 million of Canadian government securities to securities dealers, who withdrew the entire amount of the purchase from the banks. Suppose also the desired reserve ratio is 5 percent. What would this Bank of Canada transaction initially cause? a. Reserves would increase $80 million, and target reserves would increase $4 million. b. Reserves would decrease $80 million, and target reserves would decrease $4 million. c. Reserves would increase $80 million, and M2 would increase $800 million. d. Both reserves and M2 would decrease $800 million. Correct: B 17. Suppose that banks, in general, decrease their target reserve ratio from 10 percent to 8 percent. Which of the following will occur? a. Bank lending will decrease. b. Bank lending will increase. c. Bank reserves will increase. d. Interest rates will increase. Correct: B 18. Which of the following could the Bank of Canada do to increase the money supply?

a. purchase securities through its open market operations b. sell securities through its open market operations c. increase the bank rate d. move government deposits out of the chartered banks Correct: A 19. Suppose the Bank of Canada sets its operating band with the bank rate at 2.25% and the bankers' deposit rate at 1.75%. Which of the following statements is correct concerning the banks in the overnight funds market? a. A bank with surplus funds would never accept less than a 1.75% interest rate. b. A bank with surplus funds would never accept more than a 2.25% interest rate. c. A bank in need of funds would never pay more than a 1.75% interest rate. d. A bank in need of funds would never pay less than a 2.25% interest rate. Correct: A 20. Generally speaking, what causes a rapid rate of inflation? a. strong labour unions b. excessive growth in the money supply c. restrictive macroeconomic policy, which pushes up interest rates d. impulse buying of consumers, who continue to purchase the same goods even when prices go up Correct: B 21. What is the velocity of money? a. the rate at which the price index for consumer goods rises b. the multiple by which an increase in government expenditures will cause output to rise c. the rate set by the governor of the Bank of Canada d. the average number of times a dollar is used to purchase goods and services during a year Correct: D 22. What is the equation of exchange? a. money supply × nominal GDP = velocity b. velocity × money supply = nominal GDP c. money supply / velocity = nominal GDP

d. money supply / velocity = real GDP Correct: B 23. Which of the following is equivalent to the ratio of nominal GDP to the stock of money? a. the inverse of the inflation rate b. the desired reserve ratio c. the velocity of money d. the principle of exchange Correct: C 24. Suppose there is a simple economy that can produce only coats. The economy produces 500 coats per year and they sell for $200 each. The quantity of money in the economy is $10 000. What is the velocity of money? a. 2.5 b. 10 c. 20 d. 50 Correct: B 25. Suppose there is a simple economy that can produce only wheat. The economy produces 50 000 bushels per year and they sell for $10 each. The velocity of money in the economy is 500. What is the quantity of money in this economy? a. $100 b. $1,000 c. $5,000 d. $10,000 Correct: B 26. Consider an economy with only three people: Jenny the beekeeper, Joe the tailor, and Fred the baker. Suppose only one $20 bank note is accepted as money in this economy and it is currently held by Jenny. Over the course of a week, Jenny trades the $20 note for a sweater from Joe, then Joe trades the note for two loaves of artisan bread from Fred, and finally Fred trades the note for a container of honey from Jenny. Given these transactions, the nominal GDP and the velocity of money for this economy over the past week, respectively, is a. $20 and 5. b. $60 and 3.

c. $20 and 1. d. $60 and 2. Correct: B 27. Holding the velocity of money constant, if the growth of money is 5 percent but the real growth of GDP is only 2 percent, what will the inflation rate be? a. 10 percent b. 7 percent c. 5 percent d. 3 percent Correct: D 28. Which of the following would NOT be an effect of serious hyperinflation? a. increased barter for goods and services b. store owners changing their prices daily c. stabilized prices for consumer necessities d. firms paying their workers several times a week Correct: C...