Question 1

The ________ interest rate is defined as the ________ interest rate minus inflation,and it is the ________ interest rate that matters for consumption and investment decisions.

Accepted Answer

The real interest rate is defined as the nominal interest rate minus inflation, and it is the real interest rate that matters for consumption and investment decisions. Choice D correctly identifies the real interest rate as the relevant rate for such decisions, and correctly identifies the relationship between nominal and real interest rates.

Question 2

The Bank of Canada has a great deal of control over the ________,but has less control over the ________ or the ________.

Accepted Answer

The Bank of Canada has direct control over the overnight rate, which is the interest rate at which major financial institutions borrow and lend money to each other overnight. It also has some influence over long-term government bond rates, but these are largely determined by market forces such as inflation expectations and global economic conditions. The rate on bonds issued by corporations is also determined by market forces and is influenced by factors such as creditworthiness and demand for the specific bond. Therefore, the Bank of Canada has less control over these rates compared to the overnight rate and long-term government bond rates.

Question 3

While a central bank has the power to control the economy's ________ interest rate,decisions regarding consumption and investment depend on the ________ interest rate.

Accepted Answer

Nominal interest rates are the rates that are commonly used and reported in the media, and are the rates that central banks have the power to control. On the other hand, real interest rates take into account inflation, and decisions regarding consumption and investment are typically based on real interest rates.

Question 4

Because inflation tends to change relatively ________,action by the Bank of Canada to change the ________ interest rate causes the ________ interest rate to change by about the same amount.

Accepted Answer

Inflation tends to change slowly, so when the Bank of Canada changes the nominal interest rate, the real interest rate changes by about the same amount because the inflation rate remains relatively stable in the short term.

Question 5

The interest rate spread is the difference between

Accepted Answer

The interest rate spread is typically the difference between a benchmark interest rate (such as the prime rate) and a related market interest rate (such as the rate on a 10-year Treasury bond). This spread can be seen as a measure of the risk premium that investors demand for holding securities with greater credit risk or longer maturities. Option A refers to the difference between nominal and real interest rates, Option B refers to the range of interest rates set by a central bank, Option D refers to different policy rates, and Option E refers to the range within which a central bank conducts its monetary operations.

Question 6

The Bank of Canada keeps the overnight rate within the operating band by standing ready to ________ funds at the lower limit of the band and to ________ funds at the upper limit.

Accepted Answer

The answer of The Bank of Canada keeps the overnight...

Question 7

Accounts held at the Bank of Canada by financial institutions for the purpose of settling their net payment obligations to one another are called

Accepted Answer

These accounts are used for settling net payment obligations and are thus referred to as settlement balances.

Question 8

If inflation does not adjust rapidly,then when the Bank of Canada decreases the nominal interest rate,the real interest rate in the short run will

Accepted Answer

In the short run, if inflation does not adjust rapidly, a decrease in the nominal interest rate by the Bank of Canada will cause the real interest rate to decrease as well. This is because the decrease in the nominal interest rate will not be fully offset by an increase in inflation, resulting in a lower real interest rate.

Question 9

When the Bank of Canada raises its key policy rate,it sends a signal to financial intermediaries that it wants them to

Accepted Answer

When the Bank of Canada raises its key policy rate, it wants to decrease borrowing and spending in the economy to prevent inflation. To achieve this, it sends a signal to financial intermediaries such as banks to increase their short-term interest rates, which in turn makes borrowing more expensive and slows down spending.

Question 10

Macroeconomists typically assume that most market interest rates move in tandem with the central bank's official interest rate.While this assumption allows them to speak of "the" interest rate,it is a simplification of the fact that central banks generally have better control over _______ than over _______.

Accepted Answer

Central banks have more control over short-term nominal interest rates as they directly influence the overnight lending rates between banks. Long-term interest rates, on the other hand, are influenced by a variety of factors such as inflation expectations, market sentiments, and global economic conditions, making them more difficult for central banks to control. Therefore, the assumption that all market interest rates move in tandem with the central bank's official interest rate is more accurate for short-term nominal interest rates than for long-term interest rates.

Question 11

If inflation does not adjust rapidly,then when the Bank of Canada increases the nominal interest rate,the real interest rate in the short run will

Accepted Answer

If inflation does not adjust rapidly, then the increase in the nominal interest rate will cause the real interest rate to increase in the short run. This is because the nominal interest rate will be higher than the inflation rate, leading to a higher real interest rate.

Question 12

When the Bank of Canada changes the overnight rate by a certain amount,

Accepted Answer

When the Bank of Canada changes the overnight rate, short-term interest rates usually change by that amount, but long-term interest rates may or may not change by the same amount. Long-term interest rates are influenced by factors such as inflation expectations and global economic conditions, while short-term interest rates are more affected by changes in the overnight rate. Therefore, the relationship between the overnight rate and long-term interest rates is not as direct or predictable as with short-term rates.

Question 13

The fact that central banks are able to influence _________ implies that they can also influence _________ in the desired direction,because ________ is slow to adjust.

Accepted Answer

Central banks are able to influence short-term market interest rates through their monetary policies. By adjusting the supply of money in the economy, they can influence the demand for credit and therefore the interest rates. Short-term real interest rates are affected by inflation expectations, which in turn are affected by the central bank's monetary policy. The fact that inflation is slow to adjust provides the central bank with a long-term anchor for its policy decisions. Therefore, the central bank can influence inflation in the desired direction by affecting short-term interest rates.

Question 14

At the end of each working day,any bank with a surplus of funds will use the ________ to lend funds to another bank that is short of funds,charging the ________ rate.

Accepted Answer

The correct system is the "Large Value Transfer System" (LVTS) used in Canada, and the rate charged is the "overnight" rate, which is the interest rate at which banks lend funds to each other overnight.

Question 15

The electronic wire system overseen by the Bank of Canada that allows major financial institutions operating in Canada to send large payments back and forth to each other is called the

Accepted Answer

The correct name for the system is the "Large Value Transfer System" (LVTS), which is used for transferring large sums of money between financial institutions in Canada.

Question 16

When the Bank of Canada raises the overnight rate target,the ________ rate and the ________ rate usually go up by the exact same amount,but the ________ rate may or may not go up by the same amount.

Accepted Answer

When the Bank of Canada raises the overnight rate target, the overnight rate and the prime business rate usually go up by the exact same amount, as they are directly affected by the change in the overnight rate. However, the long-term government bond rate may or may not go up by the same amount, depending on other market factors such as inflation expectations and global economic conditions. Therefore, option A is the correct answer.

Question 17

When the overnight rate exceeds the overnight rate target,settlement balances are in ________ and the Bank of Canada will ________ Government of Canada bonds and ________ them at a predetermined price the next business day.

Accepted Answer

The answer of When the overnight rate exceeds the overnight...

Question 18

When the Bank of Canada cuts its key policy rate,it sends a signal to financial intermediaries that it wants them to

Accepted Answer

When the Bank of Canada cuts its key policy rate, it is trying to stimulate borrowing and spending in the economy. Lowering the key policy rate makes it cheaper for financial intermediaries to borrow money, which they can then lend to consumers at lower interest rates, encouraging them to spend more. Therefore, the Bank of Canada wants financial intermediaries to lower their short-term interest rates so that borrowing and spending increase.

Question 19

If interest rate spreads widen,central banks may have to ___________ to offset the rise interest rate spreads

Accepted Answer

If interest rate spreads widen, it means that the interest rates on lending and borrowing money are further apart. This makes it harder for businesses and consumers to get financing which can slow down economic growth. To avoid this, central banks may lower their key policy rates, making it cheaper for banks to borrow money and ideally encouraging them to lend more.

Question 20

When the overnight rate is less than the overnight rate target,settlement balances are in ________ and the Bank of Canada will ________ Government of Canada bonds and ________ them at a predetermined price the next business day.

Accepted Answer

When the overnight rate is less than the overnight rate target, it indicates a surplus of settlement balances. In this case, the Bank of Canada will sell Government of Canada bonds to remove the excess funds and bring the overnight rate closer to the target rate. The next business day, the Bank will repurchase these bonds at a predetermined price, which is known as a reverse repo or a sale and repurchase agreement. Therefore, the correct answer is D, where the settlement balances are in surplus, and the Bank of Canada will sell government bonds and repurchase them at a pre-determined price on the next day.

Quiz 10: Macroeconomic Policy

The interest rate is defined as the interest rate minus inflation,and it is the interest rate that matters for consumption and investment decisions.

The Bank of Canada has a great deal of control over the ,but has less control over the or the .

While a central bank has the power to control the economy's interest rate,decisions regarding consumption and investment depend on the interest rate.

Because inflation tends to change relatively ,action by the Bank of Canada to change the interest rate causes the interest rate to change by about the same amount.

The interest rate spread is the difference between

The Bank of Canada keeps the overnight rate within the operating band by standing ready to funds at the lower limit of the band and to funds at the upper limit.

Accounts held at the Bank of Canada by financial institutions for the purpose of settling their net payment obligations to one another are called

If inflation does not adjust rapidly,then when the Bank of Canada decreases the nominal interest rate,the real interest rate in the short run will

When the Bank of Canada raises its key policy rate,it sends a signal to financial intermediaries that it wants them to

Macroeconomists typically assume that most market interest rates move in tandem with the central bank's official interest rate.While this assumption allows them to speak of "the" interest rate,it is a simplification of the fact that central banks generally have better control over _ than over _.

If inflation does not adjust rapidly,then when the Bank of Canada increases the nominal interest rate,the real interest rate in the short run will

When the Bank of Canada changes the overnight rate by a certain amount,

The fact that central banks are able to influence _____ implies that they can also influence _ in the desired direction,because ____ is slow to adjust.

At the end of each working day,any bank with a surplus of funds will use the to lend funds to another bank that is short of funds,charging the rate.

The electronic wire system overseen by the Bank of Canada that allows major financial institutions operating in Canada to send large payments back and forth to each other is called the

When the Bank of Canada raises the overnight rate target,the rate and the rate usually go up by the exact same amount,but the rate may or may not go up by the same amount.

When the overnight rate exceeds the overnight rate target,settlement balances are in and the Bank of Canada will Government of Canada bonds and them at a predetermined price the next business day.

When the Bank of Canada cuts its key policy rate,it sends a signal to financial intermediaries that it wants them to

If interest rate spreads widen,central banks may have to ___________ to offset the rise interest rate spreads

When the overnight rate is less than the overnight rate target,settlement balances are in and the Bank of Canada will Government of Canada bonds and them at a predetermined price the next business day.