Question 1

Suppose the Canadian economy had a recessionary gap.To increase the level of desired aggregate expenditure,the Bank of Canada could

Accepted Answer

The most effective way for the Bank of Canada to increase the level of desired aggregate expenditure when the economy has a recessionary gap is by reducing its target for the overnight interest rate. This would lead to a decrease in interest rates throughout the economy and increase the demand for goods and services, thus increasing aggregate expenditure. Raising the bank rate, increasing spending, increasing reserve requirements, and selling securities in the open market would all have contractionary effects on the economy and likely worsen the recessionary gap. Therefore, reducing the target for the overnight interest rate is the best choice.

Question 2

If we observe that short-term market interest rates have fallen,we can certainly conclude that the

Accepted Answer

A decrease in short-term market interest rates does not necessarily imply a specific action by the Bank of Canada or the government regarding monetary policy or inflation targets. Interest rates can be influenced by a variety of factors, including market demand, inflation expectations, and international economic conditions, making it impossible to conclude any of the specific actions listed without more information.

Question 3

To remove an inflationary gap,the Bank of Canada would probably seek to

Accepted Answer

To remove an inflationary gap, the Bank of Canada would seek to decrease aggregate demand (spending). One way to do this is to increase interest rates, which would encourage people to save more and borrow less. This would result in less spending in the economy, which would help to decrease demand and reduce inflationary pressures. Therefore, the Bank of Canada would likely increase its target for the overnight interest rate.

Question 4

The best description of the cause-and-effect chain of an expansionary monetary policy is that it will

Accepted Answer

An expansionary monetary policy involves increasing the money supply, which leads to lower interest rates. Lower interest rates encourage investment spending, which in turn increases real GDP. Therefore, A is the correct answer as it describes the cause-and-effect chain of an expansionary monetary policy accurately.

Question 5

If there were a large and persistent recessionary gap,an appropriate monetary policy could include

Accepted Answer

If there were a large and persistent recessionary gap, an appropriate monetary policy could be for the Bank of Canada to reduce its target for the overnight interest rate. By doing this, the cost of borrowing money for commercial banks decreases, which allows them to lend more money to consumers and businesses. This increased spending can help to stimulate the economy and fill the recessionary gap. Increasing the bank rate (A) and increasing the overnight lending rate (B) would have the opposite effect, as it would make borrowing more expensive and likely lead to decreased spending. Similarly, decreasing reserves available to commercial banks (C) would limit their ability to lend money and have a contractionary effect on the economy. Selling government securities to the public (E) would also have a contractionary effect as it would reduce the amount of money in circulation.

Question 6

Suppose the Bank of Canada reduces its target for the overnight interest rate by 0.50 percentage points.In this situation,the Bank will likely need to accommodate the eventual resulting change in the demand for money by

Accepted Answer

When the Bank of Canada reduces its target for the overnight interest rate, it is likely to increase the demand for money. To accommodate this change, the Bank will need to increase the supply of money by buying government securities on the open market. This will inject money into the financial system, leading to a reduction in interest rates and an increase in the demand for credit.

Question 7

The best description of the cause-and-effect chain of a contractionary monetary policy in the short run is that it will

Accepted Answer

A contractionary monetary policy involves increasing interest rates, which makes borrowing and investing more expensive. This discourages investment spending and reduces aggregate demand, causing a decrease in real GDP in the short run.

Question 8

If desired investment spending is relatively sensitive to changes in interest rates,then monetary policy could be very useful because it would

Accepted Answer

If investment spending is sensitive to changes in interest rates, then monetary policy (changes in interest rates by the central bank) would have a significant impact on investment spending, and thus overall expenditure. This means that monetary policy would be effective in reducing expenditure during inflationary periods (by raising interest rates, causing less investment spending) and effective in expanding expenditure during recessionary periods (by lowering interest rates, encouraging more investment spending).

Question 9

An expansionary monetary policy would ________ and would eventually increase the money supply.

Accepted Answer

An expansionary monetary policy involves decreasing short-term interest rates in order to encourage borrowing and increase the money supply in circulation. Selling foreign-currency reserves and government bonds or increasing the target for the overnight interest rate would reduce the money supply and be contractionary policies.

Question 10

To remove a recessionary gap,the Bank of Canada would probably seek to

Accepted Answer

To remove a recessionary gap, the Bank of Canada would want to stimulate the economy by encouraging borrowing and spending. Decreasing the target for the overnight interest rate would make borrowing cheaper and stimulate borrowing and spending, therefore closing the gap.

Question 11

If we observe that the actual rate of CPI inflation has fallen,we can certainly conclude that the

Accepted Answer

A decrease in the actual rate of CPI inflation does not necessarily imply any specific action by the Bank of Canada or the government regarding monetary policy or inflation targeting. Various factors, including external economic conditions, changes in demand, and supply shocks, can influence inflation rates. Therefore, without additional context, it is not possible to conclude any of the specific actions listed.

Question 12

Changes in monetary aggregates such as M2 and M2+ can be a poor guide to the stance of monetary policy if

Accepted Answer

If money demand is changing in unpredictable ways, then changes in monetary aggregates like M2 and M2+ may not accurately reflect the stance of monetary policy. This is because fluctuations in money demand can cause changes in the money supply even if the central bank is not actively changing its policy stance. In this scenario, the relationship between changes in monetary aggregates and changes in the stance of monetary policy becomes more murky and less reliable.

Question 13

Which of the following would constitute an expansionary monetary policy by the Bank of Canada?

Accepted Answer

A reduction of the Bank's target for the overnight interest rate would lead to lower borrowing costs, which would stimulate borrowing and spending by households and businesses, thereby increasing the money supply and promoting economic growth. A and B are contractionary monetary policies, as they would reduce the amount of funds available for lending and borrowing. C is also contractionary, as it involves selling securities to commercial banks, which would reduce their reserves and limit their ability to lend. Therefore, the correct answer is D.

Question 14

If we observe that the bank rate has fallen,we can conclude that the

Accepted Answer

A decrease in the bank rate is an indication of an expansionary monetary policy. When the Bank of Canada lowers the bank rate, it becomes cheaper for banks to borrow money from the central bank, which in turn stimulates lending and spending in the economy, leading to an increase in aggregate demand.

Question 15

Suppose the Bank of Canada increases its target for the overnight interest rate by 0.25 percentage points.In this situation,the Bank will likely need to accommodate the resulting change in the demand for money by

Accepted Answer

When the Bank of Canada increases its target for the overnight interest rate, it is trying to reduce the demand for money. To accommodate this change, the Bank of Canada needs to decrease the supply of money. This can be achieved by selling government securities on the open market, which reduces the amount of money in circulation and increases the cost of borrowing. Therefore, the correct answer is (D) decreasing the supply of money by selling government securities on the open market.

Question 16

If we observe that the actual rate of CPI inflation has increased,we can certainly conclude that the

Accepted Answer

The increase in the actual rate of CPI inflation could be due to a variety of factors such as supply shocks, changes in demand, or external economic influences, and not necessarily directly related to the specific actions of the Bank of Canada or the government's monetary policy stance.

Question 17

If we observe a small decrease in the actual overnight interest rate over a several-day period,we can definitely conclude that the

Accepted Answer

A small decrease in the actual overnight interest rate over a several-day period is not sufficient evidence to conclude any of the options given. It could be influenced by a variety of factors beyond just monetary policy, such as market conditions and external shocks. Therefore, it is not possible to conclude any of the above with certainty.

Question 18

Suppose the Canadian economy had an inflationary gap.To decrease the level of aggregate desired investment,the Bank of Canada could

Accepted Answer

To decrease the level of aggregate desired investment and address an inflationary gap, the Bank of Canada could raise its target for the overnight interest rate. This action would make borrowing more expensive, thereby reducing investment spending and helping to cool down the economy.

Question 19

If we observe a small increase in the actual overnight interest rate over a several-day period,we can definitely conclude that the

Accepted Answer

A small increase in the actual overnight interest rate over a several-day period may be due to various reasons such as an increase in demand or decrease in supply of funds in the overnight market, a change in market sentiment, or changes in global market conditions, and cannot be solely attributed to any specific monetary policy measure or government action. Therefore, it is not possible to conclusively identify any of the given options as the reason for the increase in interest rates.

Question 20

If we observe that the bank rate has increased,we can conclude that the

Accepted Answer

An increase in the bank rate indicates that the Bank of Canada has implemented a contractionary monetary policy. This policy aims to decrease the amount of money circulating in the economy and control inflation.

Quiz 28: Monetary Policy in Canada