EC140 Chap28-34 PDF

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Chap 28

C Any central bank, including the Bank of Canada, can implement its monetary policy by directly influencing either ________ or ________, but not both. a. Money supply; money demand b. Aggregate supply; aggregate demand c. The money supply; the interest rate d. Aggregate demand; the interest rate e. The price level; the interest rate A In general, if a central bank chooses to target the money supply in its implementation of monetary policy, then a. The interest rate is determined by monetary equilibrium, and cannot be precisely predicted because of possible shocks to money demand. b. The interest rate can be more carefully controlled. c. Implementation of policy is more straightforward because money supply is more easily controlled than the interest rate. d. The interest rate is determined by the Minister of Finance. e. The implementation of policy is more straightforward because the central bank can control the process of deposit creation. E In general, if a central bank chooses to target the interest rate in its implementation of monetary policy, then a. It is more difficult to communicate this policy to the public than a change in money supply. b. The central bank can more easily control the process of deposit creation by the commercial banks. c. The money supply is determined by the Minister of Finance. d. The implementation of policy is more straightforward because the central bank knows precisely the slope and position of the money demand curve. e. It conducts the necessary open-market operations to accommodate the resulting change in money demand. D Consider the implementation of monetary policy. One difficulty in attempting to stabilize the economy by controlling the money supply is that a. Firms may be sensitive to changes in the rate of interest. b. The Bank of Canada can print more money. c. The commercial banks may choose not to hold excess reserves. d. The money demand function may be unstable. e. The Canadian government requires long-term loans.

E If the Bank of Canada chooses to expand M2 by exactly $1 million, it could do so by a. Buying $1 million worth of government securities on the open market. b. Selling $1 million worth of government securities on the open market. c. Increasing reserves at the commercial banks by $1 million. d. Decreasing reserves at the commercial banks by $1 million. e. None of the above - the Bank of Canada cannot precisely control the money supply. B In practice, it is not possible for the Bank of Canada to control the money supply because a. The resulting effects on the value of the Canadian dollar are difficult to predict. b. It cannot control the process of deposit creation carried out by the commercial banks. c. It cannot control the amount of cash reserves that are injected into or withdrawn from the banking system. d. It does not have the legal power to do so. e. None of the above—the Bank of Canada could control the money supply if it chose to do so. C Suppose the Bank of Canada were to implement an expansionary monetary policy by buying government securities on the open market, thereby increasing cash reserves in the banking system. If the commercial banks do not expand their lending in response, then - There would be no change in the money supply at all; - The Bank of Canada could force the commercial banks to expand their lending, based on regulations in the Bank Act; - The increase in the overall money supply would be smaller than the Bank of Canada may have intended. a. 1 only b. 2 only c. 3 only d. 1 or 2 e. 2 or 3 E One reason that the Bank of Canada does not try to influence the money supply directly is that a. The Bank of Canada has many other policy tools with which it can influence aggregate demand.

b. The Bank of Canada does not have the mandate to change the money supply. c. Because the money demand curve is almost horizontal, changes in the money supply would have little or no effect on the interest rate. d. Because the investment demand curve is almost vertical, any change in the interest rate resulting from a change in money supply would have little or no effect on desired investment expenditure. e. The slope of the money demand curve is not precisely known, and so the effect on the interest rate of a change in money supply is uncertain. B Most central banks, including the Bank of Canada, implement monetary policy by a. Controlling the money supply directly. b. Influencing a short-term interest rate directly. c. Influencing investment demand directly. d. Influencing the demand for money directly. e. Controlling the process of deposit creation in the commercial banking system. E The Bank of Canada chooses to influence interest rates directly rather than influencing the money supply directly because a. The former method does not require knowledge of the position of the money demand curve. b. The deposit creation mechanism in the banking system is outside the full control of the Bank of Canada. c. It is easier to communicate policy actions to the public by setting the interest rate. d. The former method does not require knowledge of the slope of the money demand curve. e. All of the above. B Refer to Figure 28-1. If the Bank of Canada raises the target interest rate to 3%, as shown in part (i), then it must accommodate the resulting ________ in quantity of money demanded by ________ in financial markets. a. Increase; selling government securities b. Decrease; selling government securities c. Increase; buying government securities d. Decrease; buying government securities

B Refer to Figure 28-1. If the Bank of Canada pursues a(n) ________ monetary policy and raises the target interest rate from 2% to 3%, then the quantity of money demanded will ________. a. Contractionary; rise b. Contractionary; fall c. Expansionary; not change d. Expansionary; rise e. Expansionary; fall E Refer to Figure 28-1. If the Bank of Canada's goal is to increase the target interest rate from 2% to 3%, then the most effective approach is to a. Reduce the money supply to , as shown in part (ii), and then let the interest rate adjust to 3%. b. Increase the money supply to , as shown in part (ii), and then let the interest rate adjust to 3%. c. Allow the money supply to shift to by market forces, which will cause the interest rate to rise to 3%. d. Raise the interest rate to 3%, as shown in part (i), and then buy government securities in financial markets to accommodate the decline in the quantity of money demanded. e. Raise the interest rate to 3%, as shown in part (i), and then sell government securities in financial markets to accommodate the decline in the quantity of money demanded. D Refer to Figure 28-1. The Bank of Canada must be able to easily communicate its monetary policy actions to the public. Which approach is more amenable to this requirement, and why? a. Part (ii) - targeting the money supply: because an announcement of a 1% decrease in the money supply is more easily understood than an increase in the interest rate. b. Part (i) - targeting the interest rate: because the Bank of Canada can more easily instruct the commercial banks to raise their interest rates. c. Part (ii) - targeting the money supply: because the public can more easily understand that a decrease in reserves in the banking system makes it more difficult to get a loan or mortgage. d. Part (i) - targeting the interest rate: because changes in the interest rate are much more meaningful and understandable to the public than changes in the money supply. C Refer to Figure 28-1. One advantage of implementing monetary policy by targeting the interest rate as shown in part (i), rather than targeting the money supply as shown in part (ii), is that

a. It is easier to get political support for changes in interest rates than for changes in the money supply. b. It is almost impossible to change the money supply without passing new legislation. c. The overall change in interest rates, and thus on aggregate demand, is more certain. d. Changes in interest rates have a stronger impact on aggregate demand than do changes in the money supply. e. The position and slope of the money demand curve are known with certainty. C In practice, the Bank of Canada uses monetary policy to reduce undesirable fluctuations in real GDP by a. Controlling business investment expenditures directly. b. Controlling government spending. c. Influencing market interest rates through changes in its target for the overnight interest rate. d. Directly influencing the money supply which affects the interest rate and hence, consumption and investment. e. Targeting the money supply directly. B What is the "bank rate"? a. The interest rate at which the Bank of Canada will lend funds to the Canadian government. b. The interest rate at which the Bank of Canada will lend funds to commercial banks. c. The interest rate that commercial banks charge their best customers. d. The interest rate that the Bank of Canada pays on deposits from the commercial banks. e. It is the same as a margin requirement. B Loans from the Bank of Canada are a. Made only to the Canadian federal government and to provincial governments. b. Made to commercial banks at the bank rate. c. Made to commercial banks at the prime rate and are short-term in nature. d. Made to large non-bank corporations. e. The Bank's major policy instrument. A To reduce short-term market interest rates, the Bank of Canada could a. Reduce its target for the overnight rate.

b. Decrease the commercial banks' reserves. c. Decrease the money supply directly. d. Adjust the rate paid on Treasury bills. e. Reduce the commercial banks' reserve requirements. B The Bank of Canada determines the "bank rate" by setting it equal to the upper end of a 50 basis-point-range that the a. Government of Canada pays for short term loans to meet interest payments on the public debt. b. Bank of Canada announces as a target range for the overnight interest rate. c. Bank of Canada announces as a target range for the exchange rate between the Canadian Dollar and the US Dollar. d. Bank of Canada announces as the target range for the five-year mortgage rate. e. Bank of Canada announces as its target for the core rate of inflation. B To raise short-term market interest rates, the Bank of Canada could a. Purchase government securities in the open market. b. Increase its target for the overnight rate. c. Increase the commercial banks' required reserves. d. Adjust the rate paid on Treasury bills. e. Lower the reserve requirement. A In practice, the Bank of Canada implements its monetary policy by a. Directly influencing the overnight interest rate. b. Directly influencing the excess reserves in the commercial banking system. c. Setting the money supply. d. Directly influencing the price level. e. Influencing the slope of the money demand curve. E The term structure of interest rates refers to a. The general observation that the yield on 30-year government bonds is less than the yield on 90-day Treasury bills. b. The variance of the different interest rates available in the economy. c. The composition of the market interest rate. d. The variation of the market interest rate over the span of one year.

e. The pattern of interest rates that corresponds to the varying terms to maturity of government securities. C The interest rate that commercial banks charge each other for the shortest period of borrowing or lending is called the a. Term interest rate. b. Prime rate. c. Overnight interest rate. d. Bank rate. e. Preferred lending rate. D The interest rate that the Bank of Canada charges commercial banks for loans is called the a. Term interest rate. b. Prime rate. c. Overnight interest rate. d. Bank rate. e. Preferred lending rate. D Suppose the Bank of Canada announces its target for the overnight interest rate at 2.5%. In that case, the Bank of Canada is willing to lend to commercial banks at ________% and is willing to pay ________% on deposits it receives from commercial banks. a. 2.25; 2.5 b. 2.5; 2.0 c. 2.5; 2.5 d. 2.75; 2.25 e. 3.5; 1.5 E The Bank of Canada establishes a rate at which they will lend to commercial banks and a rate at which they will borrow from commercial banks. By doing so, a. The Bank of Canada can ensure that the actual overnight interest rate will never fall below 2%. b. The Bank of Canada can ensure that the commercial banks will not be earning excess profits. c. The Bank of Canada can ensure that money demand remains at the level necessary for monetary equilibrium. d. The Bank of Canada establishes a spread, into which all interest rates in the economy fall. e. The Bank of Canada can ensure that the actual overnight interest rate will fall between these two interest rates.

C Suppose the Bank of Canada lowers its target for the overnight interest rate and longer-term rates in the market fall as a result. Households' and firms' demand for new loans from the commercial banks would ________. In order to make the new loans, the commercial banks require more ________. a. Rise; government securities b. Fall; currency c. Rise; cash reserves d. Remain stable; excess reserves e. Fall; excess reserves E Suppose the Bank of Canada raises its target for the overnight interest rate and longer-term rates in the market rise as a result. Households' and firms' demand for loans from the commercial banks would ________. In order to accommodate this change, the commercial banks require ________. a. Rise; more government securities b. Fall; more cash reserves c. Rise; more currency d. Remain stable; no change to their reserves e. Fall; fewer cash reserves B Suppose the Bank of Canada lowers its target for the overnight interest rate and longer-term interest rates in the market fall as a result. When this occurs, the commercial banks respond to a. An increase in the demand for loans by buying government securities from the Bank of Canada, against which they can extend new loans. b. An increase in the demand for loans by selling government securities to the Bank of Canada in exchange for cash, with which they can extend new loans. c. A decrease in the demand for loans by selling government securities to the Bank of Canada and calling in existing loans. d. A decrease in the demand for loans by buying government securities from the Bank of Canada in exchange for cash, and calling in existing loans. e. An increase in the demand for loans by borrowing cash from the Bank of Canada with which they can extend new loans. D Suppose the actual overnight interest rate is 3.5%. If the Bank of Canada raises its target for the overnight interest rate to 4%, and longer-term interest rates in the market rise as a result,

a. The demand for loans from commercial banks falls, the commercial banks sell government securities to the Bank of Canada, and the money supply falls. b. The demand for loans from commercial banks rises, the commercial banks buy government securities from the Bank of Canada, and the money supply falls. c. The demand for loans from commercial banks rises, the commercial banks sell government securities to the Bank of Canada, and the money supply rises. d. The demand for loans from commercial banks falls, the commercial banks buy government securities from the Bank of Canada, and the money supply falls. e. The demand for loans from commercial banks rises the commercial banks buy government securities from the Bank of Canada, and the money supply rises. A Suppose the actual overnight interest rate is 4%. If the Bank of Canada lowers its target for the overnight rate to 3.75%, the money supply will eventually a. Increase as a result of open-market operations. b. Increase as a result of an increase in excess reserves in the banking system. c. Decrease as a result of an increase in excess reserves in the banking system. d. Decrease as a result of open-market operations. e. Decrease as a result of a decrease in the demand for new loans. B If the Bank of Canada wants to influence real economic variables in the short run, it uses a. Policy instruments such as the exchange rate and investment to influence the economy. b. Its only policy instrument—the overnight interest rate target—to influence aggregate demand. c. Policy variables such as the exchange rate and investment to influence aggregate demand. d. Policy variables such as open-market operations to influence aggregate demand. e. Policy variables such as the money supply to influence investment and aggregate supply. B The overnight interest rate is crucial to the Bank of Canada when it implements its monetary policy because a. The Bank of Canada's first priority is to ensure the solvency of commercial banks.

b. Its changes in the overnight interest rate generally lead to changes in longer-term interest rates. c. Overnight loans constitute a major source for open-market operations. d. The Bank of Canada has no ability to influence other interest rates. e. It is the result of the Bank of Canada's regular changes in the money supply. C Suppose the Bank of Canada announces its target for the overnight interest rate at 2.75%. What is the Bank's target range for the overnight interest rate? a. 1.75 - 3.75% b. 2.25 - 3.25% c. 2.5 - 3.00% d. 2.7 - 2.8% e. 2.74 - 2.76% B Suppose the Bank of Canada's announced target for the overnight interest rate is 2.75%. Why should we expect commercial banks to borrow and lend overnight funds at a rate very close to this target? a. Because the Bank of Canada Act requires that commercial banks borrow from each other at a rate no higher than 0.25% above the target rate. b. Because commercial banks know that they can borrow from the Bank of Canada at 3.00%, and lend to the Bank at 2.50% so the rate they charge each other will stay within that range. c. Because the Bank of Canada chooses its target rate based on the anticipated borrowing needs of the commercial banks. d. Because it is not legal for commercial banks to transact between each other at any rate outside of the Bank of Canada's target range. e. Because commercial banks face regulatory obstacles if they borrow from each other at any rate outside of the Bank of Canada's target range. C How does the Bank of Canada communicate its target for the overnight interest rate to the public? a. Monthly announcements at fixed announcement dates (FADs) b. In its quarterly publication, "Monetary Policy Report" c. Announcements made 8 times per year at pre-specified fixed announcement dates (FADs) d. The target is communicated to the minister of finance for approval and then released to the public on a quarterly basis

e. The target is communicated to the Prime Minister for approval and then released to the public at 8 pre-specified fixed announcement dates (FADs) E In Canada, open-market operations are a. Government actions aimed at creating competition within the banking industry. b. Loans made by the Bank of Canada to the commercial banks. c. Conducted to enforce the reserve requirements of commercial banks. d. No longer carried out. e. The buying and selling of government securities by the Bank of Canada. C The Bank of Canada's purchases and sales of government securities, when they occur, are referred to as a. Increases and decreases in government expenditure. b. Margin requirements. c. Open-market operations. d. Reserve requirements. e. The setting of the bank rate. D If the Bank of Canada chooses to expand the money supply directly, it could a. Sell government securities on the open market. b. Sell some of its foreign currency assets. c. Reduce its deposits at commercial banks. d. Buy government securities on the open market. e. Change the price level. E When the Bank of Canada enters the open market and buys or sells government securities, we refer to this as a. Monetary policy. b. Commercial lending. c. Changing the target reserve ratio. d. Setting the target ratio. e. Open-market operations. E The Bank of Canada conducts its open-market operations directly in response to a. Changes in aggregate demand. b. Orders from Parliament. c. Its announced changes in the money supply. d. Changes in the price level.

e. The changing demand for cash reserves from the commercial banks. C The amount of currency in circulation in the Canadian economy is described as being endogenous to the system. This is because a. The pro...