Deck 11: Steering Blindly Monetary Policy and the Bank of Canada

Question 1

Core inflation is the percentage change in

A) the Consumer Price Index including the eight most volatile prices.
B) an inflation rate that ranges between 1 percent and 3 percent annually.
C) the Consumer Price Index excluding the eight most volatile prices.
D) the average of the 8 most volatile prices in the Consumer Price Index.
E) the target midpoint inflation rate.

Answer 1

the Consumer Price Index excluding the eight most volatile prices.

Question 2

The Bank of Canada's inflation-control target is an inflation rate

A) between 1 and 3 percent.
B) between 1 and 2 percent.
C) between 2 and 3 percent.
D) of 0 percent, or no inflation.
E) of less than 5 percent.

Answer 2

between 1 and 3 percent.

Question 3

The current Governor of the Bank of Canada is Mark Carney.

Answer 3

False

Question 4

Canada's inflation control target is an annual inflation rate of 1 - 3 percent as measured by the consumer price index (CPI).

Question 5

Price stability means the inflation rate is zero.

Question 6

The Bank of Canada is responsible for monetary policy.

Question 7

The Prime Minister is the driver at the wheel for Canadian monetary policy.

Question 8

Interest rates are the Bank of Canada's most important monetary policy tool.

Question 9

The Bank of Canada uses monetary policy to steer the economy towards stable prices, steady economic growth, and full employment.

Question 10

When the inflation rate is 2 percent the Bank of Canada should take no action.

Question 11

Canada's inflation control target is an annual inflation rate of 1 to 3 percent as measured by the core consumer price index.

Question 12

The Bank of Canada's inflation-control target is measured by the

A) core CPI.
B) CPI.
C) CPI, with core CPI as an operational guide.
D) core CPI, with CPI as an operational guide.
E) Minister of Finance.

Question 13

The Bank of Canada's price stability goal is keeping the

A) price level stable.
B) unemployment rate low at any cost.
C) inflation rate low at any cost.
D) inflation rate at zero so it does not significantly affect people's economic decisions.
E) inflation rate low enough so it does not significantly affect people's economic decisions.

Question 14

Price stability means an inflation rate low enough that it does not significantly affect people's economic decisions.

Question 15

The Bank of Canada's inflation-control target range is ________ percent a year, and monetary policy aims for a target inflation rate of ________ percent a year.

A) 3 to 5; 4
B) 1 to 3; 2
C) 2 to 4; 3
D) 0 to 2; 1
E) -1 to 1; 0

Question 16

In addition to the overall CPI inflation rate, the Bank of Canada plays close attention to the core inflation rate because it

A) is more volatile and therefore a better predictor of the underlying trend of inflation.
B) includes taxes, while the overall CPI rate does not.
C) has a lower average value which makes the Bank look better.
D) is less volatile and a better predictor of the underlying trend of inflation.
E) excludes eight volatile prices and is more likely to stay within the target range.

Question 17

Canada has a monetary-based economy.

Question 18

Price stability means the inflation rate is constant.

Question 19

The core inflation rate

A) is used by the Bank of Canada as an operational guide.
B) excludes products and services with the most volatile prices.
C) provides the best measure of the underlying trend of inflation.
D) does not fluctuate as much at the inflation rate based on the CPI.
E) is all of the above.

Question 20

The Bank of Canada is responsible for fiscal policy.

Question 21

To achieve its inflation-control target, the Bank of Canada focuses on the

A) 10-year government bond rate.
B) prime rate.
C) 3-month Treasury bill rate.
D) overnight rate.
E) rate for 25-year variable mortgages.

Question 22

When the Bank of Canada uses open market operations to raise the overnight rate, the

A) demand for money increases.
B) demand for money decreases.
C) supply of money increases.
D) supply of money decreases.
E) supply of bonds decreases.

Question 23

When the inflation rate is 4 percent, the Bank of Canada will

A) buy bonds to lower interest rates and shift the aggregate demand curve rightward.
B) sell bonds to raise interest rates and shift the aggregate demand curve leftward.
C) do nothing, since an interest rate of 4 percent is desirable.
D) sell bonds to lower interest rates and accelerate the economy.
E) buy bonds to raise interest rates and slow down the economy.

Question 24

When the Bank of Canada sells bonds the

A) increased supply of bonds lowers bond prices and lowers interest rates.
B) increased supply of bonds lowers bonds prices and raises interest rates.
C) money supply increases.
D) increased demand for bonds raises bond prices and lowers interest rates.
E) increased demand for bonds raises bond prices and raises interest rates.

Question 25

When the Bank of Canada buys bonds the

A) increased demand for bonds raises bond prices and raises interest rates.
B) increased supply of bonds lowers bond prices and raises interest rates.
C) money supply decreases.
D) increased supply of bonds raises bond prices and lowers interest rates.
E) increased demand for bonds raises bond prices and lowers interest rates.

Question 26

When the Bank of Canada buys bonds on the bond market, the

A) demand for bonds increases.
B) demand for bonds decreases.
C) supply of bonds increases.
D) supply of bonds decreases.
E) supply of money decreases.

Question 27

Everyone in Canada agrees about the Bank of Canada's inflation control target of 1 to 3 percent.

Question 28

When the Bank of Canada uses open market operations to lower the overnight rate, the

A) demand for money increases.
B) demand for money decreases.
C) supply of money increases.
D) supply of money decreases.
E) supply of bonds increases.

Question 29

When the inflation rate is 4 percent, the Bank of Canada will

A) buy bonds to lower interest rates and increase aggregate demand.
B) sell bonds to raise interest rates and decrease aggregate demand.
C) do nothing, since an interest rate of 4 percent is desirable.
D) sell bonds to lower interest rates and accelerate the economy.
E) buy bonds to raise interest rates and slow down the economy.

Question 30

The Bank of Canada was created during the economic boom of the 1920s.

Question 31

When the Bank of Canada sells bonds on the bond market, the

A) demand for money increases.
B) demand for money decreases.
C) supply of money increases.
D) supply of money decreases.
E) supply of bonds decreases.

Question 32

When the Bank of Canada uses open market operations to lower the overnight rate, the

A) demand for bonds increases.
B) demand for bonds decreases.
C) supply of bonds increases.
D) supply of bonds decreases.
E) supply of money decreases.

Question 33

The Bank of Canada aims for a target inflation rate of 0 percent.

Question 34

The Bank of Canada was created in 1935 during the Great Depression.

Question 35

The current Governor of the Bank of Canada is Stephen Poloz.

Question 36

The Bank of Canada aims for a target inflation rate of 2 percent.

Question 37

When the Bank of Canada sells bonds on the bond market, the

A) demand for bonds increases.
B) demand for bonds decreases.
C) supply of bonds increases.
D) supply of bonds decreases.
E) supply of money increases.

Question 38

When the Bank of Canada uses open market operations to raise the overnight rate, the

A) demand for bonds increases.
B) demand for bonds decreases.
C) supply of bonds increases.
D) supply of bonds decreases.
E) supply of money increases.

Question 39

The original Bank of Canada Act directs the Bank to control the money supply and interest rates to avoid inflation, business cycles, and unemployment.

Question 40

When the Bank of Canada buys bonds on the bond market, the

A) demand for money increases.
B) demand for money decreases.
C) supply of money increases.
D) supply of money decreases.
E) supply of bonds increases.

Question 41

When the Bank of Canada sells bonds to a chartered bank, chartered bank reserves

A) decrease and interest rates rise.
B) decrease and chartered banks make additional loans.
C) increase and chartered banks make additional loans.
D) increase and chartered banks reduce loans.
E) increase and interest rates fall.

Question 42

When the economy is slowing down too much, all of the following happen except

A) inflation is below target inflation.
B) real GDP is below potential GDP.
C) unemployment is increasing.
D) there is an inflationary gap.
E) there is a recessionary gap.

Question 43

When the Bank of Canada buys bonds on the bond market, this

A) decreases chartered bank reserves.
B) increases chartered bank loans to the public.
C) lowers the price of bonds.
D) fights inflation.
E) decreases the money supply.

Question 44

If the Bank of Canada wants to eliminate an inflationary gap, it will

A) buy government bonds.
B) lower the overnight rate.
C) raise the overnight rate.
D) raise the inflation target.
E) lower the inflation target.

Question 45

Which statement about interest rates is false?

A) The prime rate equals the overnight rate plus 3 percent.
B) Long-run interest rates tend to be higher than short-run interest rates.
C) Long-run bonds tend to be riskier than short-run bonds.
D) Investors require a higher reward for forgoing more liquidity.
E) Long-run interest rates fluctuate less than short-run interest rates.

Question 46

25 basis points is

A) a quarter of one percent.
B) 25 percent.
C) the difference between the overnight rate and the prime rate.
D) the difference between the inflation rate measured by the CPI and by the core CPI.
E) the difference between the prime rate and the 3-month Treasury Bill rate.

Question 47

When the Bank of Canada sells bonds on the bond market, this

A) lowers interest rates.
B) decreases chartered bank reserves.
C) increases the quantity of money.
D) increases chartered bank loans to the public.
E) increases chartered bank reserves.

Question 48

If the annual inflation rate is 0.5 percent, the Bank of Canada will

A) sell bonds to raise interest rates and slow down the economy.
B) buy bonds to lower interest rates and accelerate the economy.
C) do nothing since an inflation rate of 0.5 percent is desirable.
D) buy bonds to raise interest rates and increase aggregate demand.
E) sell bonds to lower interest rates and increase aggregate demand.

Question 49

When the Bank of Canada buys bonds from a chartered bank, chartered bank reserves

A) decrease and chartered banks make additional loans.
B) increase and chartered banks reduce loans.
C) decrease and chartered banks reduce loans.
D) decrease and interest rates fall.
E) increase and chartered banks make additional loans.

Question 50

Which statement about interest rates is false?

A) The prime rate equals the overnight rate plus 2 percent.
B) Long-run interest rates tend to be higher than short-run interest rates.
C) Long-run bonds tend to be riskier than short-run bonds.
D) Investors require a higher reward for bonds with more liquidity.
E) Long-run interest rates fluctuate less than short-run interest rates.

Question 51

Which statement about interest rates is false?

A) The prime rate equals the overnight rate plus 2 percent.
B) Long-run interest rates tend to be higher than short-run interest rates.
C) Long-run bonds tend to be riskier than short-run bonds.
D) Investors require a higher reward for forgoing more liquidity.
E) Long-run interest rates fluctuate more than short-run interest rates.

Question 52

Which statement about interest rates is false?

A) The prime rate equals the overnight rate plus 2 percent.
B) Long-run interest rates tend to be lower than short-run interest rates.
C) Long-run bonds tend to be riskier than short-run bonds.
D) Investors require a higher reward for forgoing more liquidity.
E) Long-run interest rates fluctuate less than short-run interest rates.

Question 53

If the Bank of Canada is worried about inflation it will ________ the overnight rate to ________.

A) raise; shift the aggregate demand curve rightward
B) lower; shift the aggregate demand curve rightward
C) raise; shift the aggregate demand curve leftward
D) lower; shift the aggregate demand curve leftward
E) raise; decrease potential GDP

Question 54

To increase aggregate demand, the Bank of Canada

A) sells bonds, decreasing chartered bank reserves, decreasing lending, and lowering the overnight rate.
B) sells bonds, decreasing chartered bank reserves, decreasing lending, and raising the overnight rate.
C) sells bonds, decreasing chartered bank reserves, increasing lending, and raising the overnight rate.
D) buys bonds, increasing chartered bank reserves, increasing lending, and lowering the overnight rate.
E) buys bonds, increasing chartered bank reserves, increasing lending, and raising the overnight rate.

Question 55

The Bank of Canada changes the target rate

A) continuously.
B) eight times a year.
C) without warning the public.
D) once a year in the annual budget.
E) every 24 months.

Question 56

Which statement about interest rates is false?

A) The prime rate equals the overnight rate plus 2 percent.
B) Long-run interest rates tend to be higher than short-run interest rates.
C) Short-run bonds tend to be riskier than long-run bonds.
D) Investors require a higher reward for forgoing more liquidity.
E) Long-run interest rates fluctuate less than short-run interest rates.

Question 57

If the Bank of Canada is worried about inflation it will ________ the overnight rate to ________.

A) raise; increase aggregate demand
B) lower; increase aggregate demand
C) raise; decrease aggregate demand
D) lower; decrease aggregate demand
E) raise; decrease potential GDP

Question 58

When the economy is speeding too fast, all of the following happen except

A) inflation is above target inflation.
B) real GDP is above potential GDP.
C) unemployment is increasing.
D) there is an inflationary gap.
E) nominal GDP is above real GDP.

Question 59

Which statement about interest rates is true?

A) The prime rate equals the overnight rate plus 2 percent.
B) Long-run interest rates tend to be lower than short-run interest rates.
C) Short-run bonds tend to be riskier than long-run bonds.
D) Investors require a higher reward for bonds with more liquidity.
E) Long-run interest rates fluctuate more than short-run interest rates.

Question 60

To decrease aggregate demand, the Bank of Canada

A) raises the overnight rate, increasing the money supply.
B) lowers the overnight rate, increasing the money supply.
C) lowers the overnight rate, decreasing the money supply.
D) raises the overnight rate, decreasing the money supply.
E) raises the overnight rate, decreasing the demand for money.

Question 61

In an inflationary gap, the Bank of Canada raises interest rates to decrease aggregate demand.

Question 62

When the Bank of Canada buys bonds from a chartered bank, chartered bank reserves increase and interest rates fall.

Question 63

Which statement about interest rates is true?

A) The prime rate equals the overnight rate plus 3 percent.
B) Long-run interest rates tend to be lower than short-run interest rates.
C) Long-run bonds tend to be riskier than short-run bonds.
D) Investors require a higher reward for bonds with more liquidity.
E) Long-run interest rates fluctuate more than short-run interest rates.

Question 64

Interest rates are determined in money and loanable funds markets and by central banks.

Question 65

Central banks determine long-run interest rates.

Question 66

The overnight rate is the interest rate that chartered banks charge each other for one-day loans.

Question 67

When the inflation rate is 5 percent, the Bank of Canada will sell bonds to raise interest rates and decrease aggregate demand.

Question 68

When the Bank of Canada sells bonds, the increased demand for bonds raises bond prices and lowers interest rates.

Question 69

To lower interest rates and accelerate the economy, the Bank of Canada buys bonds which increases the money supply.

Question 70

Which statement about interest rates is true?

A) The prime rate equals the overnight rate plus 3 percent.
B) Long-run interest rates tend to be lower than short-run interest rates.
C) Short-run bonds tend to be riskier than long-run bonds.
D) Investors require a higher reward for bonds with more liquidity.
E) Long-run interest rates fluctuate less than short-run interest rates.

Question 71

To raise interest rates and slow down the economy, the Bank of Canada sells bonds which increases the money supply.

Question 72

Which statement about interest rates is true?

A) The prime rate equals the overnight rate plus 3 percent.
B) Long-run interest rates tend to be higher than short-run interest rates.
C) Short-run bonds tend to be riskier than long-run bonds.
D) Investors require a higher reward for bonds with more liquidity.
E) Long-run interest rates fluctuate more than short-run interest rates.

Question 73

In a recessionary gap, the Bank of Canada raises interest rates to decrease aggregate demand.

Question 74

The Bank of Canada changes its target rate once a year.

Question 75

When the Bank of Canada buys bonds, chartered bank reserves increase and banks can increase lending.

Question 76

The prime rate equals the overnight rate plus 2 percent.

Question 77

Loanable funds markets, not central banks, determine long-run interest rates.

Question 78

Which statement about interest rates is true?

A) The prime rate equals the overnight rate plus 3 percent.
B) Long-run interest rates tend to be lower than short-run interest rates.
C) Short-run bonds tend to be riskier than long-run bonds.
D) Investors require a higher reward for foregoing more liquidity.
E) Long-run interest rates fluctuate more than short-run interest rates.

Question 79

When the inflation rate is 0.5 percent, the Bank of Canada will sell bonds to lower interest rates and accelerate the economy.

Question 80

Interest rates are determined entirely by central banks.