Question 1

Which of the following statements about inflation targeting is true?

Accepted Answer

Inflation targeting is a monetary policy framework where a central bank sets an explicit target for inflation and adjusts its policy instruments (such as interest rates) to achieve that target. Option A is incorrect, as inflation targeting can still allow for action against a severe recession, although the focus may shift temporarily away from the inflation target. Option B is incorrect, as inflation targeting has been adopted by many countries, including Australia, Canada, New Zealand, Sweden, and the United Kingdom. Option D is incorrect, as inflation targeting is also practiced in Europe, especially by the European Central Bank. Option E is incorrect, as inflation targeting allows central banks to adjust the money supply to achieve their inflation targets. Option C is correct, as inflation targeting in Canada has helped to institutionalize good monetary policy practices over time, regardless of changes in leadership at the Bank of Canada.

Question 2

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

Accepted Answer

Supporters of a monetary growth rule argue that active monetary policy (frequent adjustments in monetary policy in response to economic changes) can destabilize the economy. They believe that it can lead to more frequent and severe recessions by introducing uncertainty and making it harder for businesses and consumers to plan for the future.

Question 3

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

Accepted Answer

The Bank of Canada cannot target both the money supply and the interest rate because it does not control money demand. Money demand is determined by the actions and decisions of individuals and firms in the economy, and is influenced by factors such as inflation expectations and interest rates. Since the Bank of Canada does not have control over these factors, it cannot fully control the money demand and therefore cannot target both the money supply and the interest rate simultaneously.

Question 4

Under the monetary growth rule proposed by the monetarists, the money supply would grow each year at a constant rate equal to the long-run rate of growth of

Accepted Answer

The monetarists proposed that the money supply should grow each year at a constant rate equal to the long-run rate of growth of real GDP. This is because they believed that changes in the money supply would directly impact inflation in the long run, but would have little impact on real GDP or employment. By keeping the growth rate of the money supply in line with the long-run rate of growth of real GDP, they hoped to achieve price stability without disrupting economic growth.

Question 5

Based on the information below and the Taylor Rule, what is the appropriate target for the overnight rate? Current inflation = 9% Equilibrium real interest rate = 0% Inflation target = 2%
Output Gap = 1% Unemployment rate = 10.3%

Accepted Answer

The Taylor rule states that: 
Nominal interest rate = Equilibrium real interest rate + Inflation rate + 0.5(Inflation gap) + 0.5(Output gap)
Where, 
Inflation gap = Current inflation rate - Inflation target 
Output gap = Actual output - Potential output

Plugging in the values: 
Nominal interest rate = 0 + 2 + 0.5(9-2) + 0.5(1) 
Nominal interest rate = 0 + 2 + 3.5 + 0.5 
Nominal interest rate = 5

However, the question asks for the target overnight rate, which is currently not given. Assuming the current nominal overnight rate is 1.5%, the appropriate target for the overnight rate would be:

Target overnight rate = Current nominal interest rate + Change in nominal interest rate 
Target overnight rate = 1.5 + (5-1.5) 
Target overnight rate = 1.5 + 3.5 
Target overnight rate = 5

Therefore, the appropriate target for the overnight rate is 5%, which corresponds to choice B.

Question 6

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

Accepted Answer

The Taylor rule is a monetary policy guideline that links the target for the overnight interest rate set by the central bank (in this case, the Bank of Canada) to economic variables such as inflation and output growth. The rule suggests that the central bank should adjust its interest rate target in response to changes in these variables in order to achieve its overall policy goals of price stability and maximum sustainable economic growth. It does not directly link the money supply or changes in interest rates to these variables.

Question 7

Inflation targeting refers to conducting ________ policy so as to commit the central bank to achieving a ________.

Accepted Answer

Inflation targeting refers to conducting monetary policy so as to commit the central bank to achieving a publicly announced level of inflation. This is done by setting a target for inflation and adjusting the monetary policy tools, such as interest rates, to achieve the target. Inflation targeting generally aims for a low but positive rate of inflation, rather than zero inflation or deflation.

Question 8

The Bank of Canada adheres to the ideas expressed by ________.If the economy moves into a recession, the Bank of Canada would recommend that the overnight lending rate decrease as long as the inflation rate did not rise above the publicly announced goal for inflation.

Accepted Answer

The Bank of Canada follows the concept of flexible inflation targeting, which means that it sets a publicly announced target for inflation and adjusts the overnight lending rate to ensure that inflation stays within the target range. If the economy enters a recession, the Bank of Canada would lower the overnight lending rate to encourage borrowing and stimulate economic activity, as long as inflation remains within the target range. The other options mentioned in the question (gold standard, monetarist school of thought, Taylor Rule, and Milton Friedman) are not directly related to the Bank of Canada's policy approach.

Question 9

Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP is less than potential GDP, then the overnight interest target rate ________ the sum of the current inflation rate plus the equilibrium real overnight interest rate.

Accepted Answer

According to the Taylor rule, if real GDP is less than potential GDP, the interest rate should be set lower to stimulate the economy. Therefore, the overnight interest target rate will be less than the sum of the current inflation rate plus the equilibrium real overnight interest rate.

Question 10

If the Bank of Canada targets the interest rate and the money demand curve shifts to the left, then the Bank of Canada

Accepted Answer

The answer of If the Bank of Canada targets the...

Question 11

Most economists believe that the best monetary policy target is

Accepted Answer

Most economists believe that targeting an interest rate, such as the federal funds rate, is the best way to achieve a desired level of inflation and economic growth. Adjusting interest rates can influence borrowing and spending, which can affect the money supply and liquidity in financial markets. Additionally, targeting specific levels of money supply or bank reserves can be difficult to achieve and may not be as effective in controlling inflation and promoting economic growth.

Question 12

If the Bank of Canada targets the money supply, and the money demand curve shifts to the left, then the Bank of Canada

Accepted Answer

When the demand for money decreases (shifts to the left), the Bank of Canada can still maintain its money supply target, but this will result in a lower equilibrium interest rate. This is because, with lower demand for money, the price of borrowing money (interest rate) decreases to equilibrate the money market.

Question 13

Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP equals potential GDP, then the overnight interest rate target rate equals the

Accepted Answer

The answer of Using the Taylor rule, if the current...

Question 14

The Bank of Canada does not target both the money supply and an interest rate because

Accepted Answer

The Bank of Canada cannot achieve a target for both the money supply and an interest rate at the same time. This is because the money supply is influenced by various factors such as consumer and business behaviour, while interest rates are influenced by market conditions and the Bank of Canada's monetary policy. Trying to target both at the same time would result in conflicting objectives and make it difficult for the Bank of Canada to achieve its goals. Therefore, the Bank of Canada focuses on targeting either the money supply or interest rates, depending on the prevailing economic conditions.

Question 15

Suppose the equilibrium real overnight interest rate is 2 percent, the target rate of inflation is 2 percent, the current inflation rate is 4 percent, and real GDP is 2 percent above potential real GDP.If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the overnight interest target rate equals

Accepted Answer

The answer of Suppose the equilibrium real overnight interest rate...

Question 16

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

Accepted Answer

The weakening of the relationship between movements in the money supply and movements in real GDP and the price level means that a monetary growth rule would be less effective in achieving its intended goals. Therefore, the pressure for such a rule has decreased.

Question 17

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

Accepted Answer

According to the monetarists, a monetary growth rule involves a constant rate of growth in the money supply. Therefore, during a recession, the rate of growth of the money supply would not change.

Question 18

Which of the following statements about inflation targeting is true?

Accepted Answer

Inflation targeting would make it easier for households and firms to form accurate expectations of future inflation, improving their planning and the efficiency of the economy. The other options are incorrect. Inflation targeting has been successful in reducing inflation in many countries, and it does not prevent the central bank from addressing other policy goals or taking action against a severe recession. It also does not allow the central bank to devote all its resources to ensuring unemployment is at its natural rate.

Question 19

Using the Taylor rule, if the current inflation rate exceeds the target inflation rate and real GDP exceeds potential GDP, then the overnight interest target rate ________ the sum of the current inflation rate plus the equilibrium real overnight interest rate.

Accepted Answer

According to the Taylor rule, if inflation is above target and GDP is above potential, the central bank should increase the interest rate. This means that the overnight interest target rate will be higher than the equilibrium real overnight interest rate, which is the sum of the target inflation rate and the neutral real interest rate. Increasing the interest rate will help to cool down the economy and bring inflation back to target. Therefore, the correct answer is A - the overnight interest target rate will be greater than the sum of the current inflation rate plus the equilibrium real overnight interest rate.

Question 20

Monetarists think that the Bank of Canada should use ________ as a target when conducting monetary policy.

Accepted Answer

Monetarists, following the theories of Milton Friedman, believe that controlling the money supply is the most effective way to regulate the economy and control inflation, thus advocating for it as the target in monetary policy.

Quiz 11: Monetary Policy

Which of the following statements about inflation targeting is true?

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

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

Under the monetary growth rule proposed by the monetarists, the money supply would grow each year at a constant rate equal to the long-run rate of growth of

Based on the information below and the Taylor Rule, what is the appropriate target for the overnight rate? Current inflation = 9% Equilibrium real interest rate = 0% Inflation target = 2% Output Gap = 1% Unemployment rate = 10.3%

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

Inflation targeting refers to conducting policy so as to commit the central bank to achieving a .

The Bank of Canada adheres to the ideas expressed by ________.If the economy moves into a recession, the Bank of Canada would recommend that the overnight lending rate decrease as long as the inflation rate did not rise above the publicly announced goal for inflation.

Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP is less than potential GDP, then the overnight interest target rate ________ the sum of the current inflation rate plus the equilibrium real overnight interest rate.

If the Bank of Canada targets the interest rate and the money demand curve shifts to the left, then the Bank of Canada

Most economists believe that the best monetary policy target is

If the Bank of Canada targets the money supply, and the money demand curve shifts to the left, then the Bank of Canada

Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP equals potential GDP, then the overnight interest rate target rate equals the

The Bank of Canada does not target both the money supply and an interest rate because

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

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

Which of the following statements about inflation targeting is true?

Using the Taylor rule, if the current inflation rate exceeds the target inflation rate and real GDP exceeds potential GDP, then the overnight interest target rate ________ the sum of the current inflation rate plus the equilibrium real overnight interest rate.

Monetarists think that the Bank of Canada should use ________ as a target when conducting monetary policy.