Deck 28: Monetary Policy in Canada

Question 1

Suppose the Bank of Canada raises its target for the overnight interest rate and longer -term rates in the market rise as a result.Householdsʹ and firmsʹ 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

Answer 1

fall; fewer cash reserves

Question 2

Suppose the Bank of Canada lowers its target for the overnight interest rate and longer -term rates in the market fall as a result.Householdsʹ and firmsʹ 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

Answer 2

rise; cash reserves

Question 3

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

Answer 3

2.75; 2.25

Question 4

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.

Question 5

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.

Question 6

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.

Question 7

What is the ʺbank rateʺ?

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.

Question 8

To reduce short-term market interest rates,the Bank of Canada could

A)reduce its target for the overnight rate.
B)decrease the commercial banksʹ reserves.
C)decrease the money supply directly.
D)adjust the rate paid on Treasury bills.
E)reduce the commercial banksʹ reserve requirements.

Question 9

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 banksʹ required reserves.
D)adjust the rate paid on Treasury bills.
E)lower the reserve requirement.

Question 10

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.

Question 11

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.

Question 12

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.

Question 13

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.

Question 14

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

Question 15

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.

Question 16

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 Bankʹs major policy instrument.

Question 17

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.

Question 18

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.

Question 19

The Bank of Canada determines the ʺbank rateʺ 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.

Question 20

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.

Question 21

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

A)lower the interest rate,increase investment spending,and increase real GDP.
B)raise the interest rate,decrease investment spending,and decrease real GDP.
C)lower the interest rate,lower investment spending,and decrease real GDP.
D)raise the interest rate,decrease investment spending,and increase real GDP.
E)raise the interest rate,increase investment spending,and decrease real GDP.

Question 22

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.

Question 23

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

A)raise the bank rate.
B)increase its spending.
C)increase the reserve requirements of the commercial banks.
D)sell securities in the open market.
E)reduce its target for the overnight interest rate.

Question 24

An expansionary monetary policy by the Bank of Canada could include

A)moral suasion to increase the commercial banksʹ target reserve ratio.
B)moral suasion to reduce lending by commercial banks.
C)an open-market sale of government securities.
D)a reduction of the Bankʹs target for the overnight interest rate.
E)None of the above would be expansionary.

Question 25

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,ʺMonetary Policy Reportʺ
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)

Question 26

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.

Question 27

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.

Question 28

The Bank of Canadaʹs 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.

Question 29

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.

Question 30

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

A)reduce short-term interest rates
B)involve selling foreign-currency reserves in the foreign-exchange market
C)involve selling government bonds on the open market
D)increase short-term interest rates
E)involve increasing the target for the overnight interest rate

Question 31

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.

Question 32

Suppose the Bank of Canada announces its target for the overnight interest rate at 2.75%.What is the Bankʹs 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%

Question 33

Suppose the Bank of Canadaʹs 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 Canadaʹs target range.
E)Because commercial banks face regulatory obstacles if they borrow from each other at any rate outside of the Bank of Canadaʹs target range.

Question 34

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

A)increasing the supply of money by buying government securities on the open market.
B)increasing the supply of money by selling government securities on the open market.
C)decreasing the supply of money by buying government securities on the open market.
D)decreasing the supply of money by selling government securities on the open market.
E)maintaining the current supply of money which will increase the effectiveness of the change in the overnight interest rate.

Question 35

The amount of currency in circulation in the Canadian economy is described as being endogenous to the system.This is because

A)the process of deposit creation by the commercial banks is determined by the Bank of Canada.
B)the commercial banks determine the currency in circulation in response to the Bank of Canadaʹs changes to the money supply.
C)the Bank of Canada conducts its open-market operations in response to the changing demand for cash from the commercial banks.
D)the Bank of Canada targets the money supply directly.
E)the Bank of Canada targets the currency in circulation directly.

Question 36

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

A)buy securities in the open market.
B)lower short-term interest rates.
C)reduce its spending.
D)raise its target for the overnight interest rate.
E)raise the price level.

Question 37

The overnight interest rate is crucial to the Bank of Canada when it implements its monetary policy because

A)the Bank of Canadaʹs 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 Canadaʹs regular changes in the money supply.

Question 38

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.

Question 39

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

A)increasing the supply of money by buying government securities on the open market.
B)increasing the supply of money by selling government securities on the open market.
C)decreasing the supply of money by buying government securities on the open market.
D)decreasing the supply of money by selling government securities on the open market.
E)maintaining the current supply of money which will increase the effectiveness of the change in the overnight interest rate.

Question 40

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.

Question 41

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

A)Bank of Canada has implemented an expansionary monetary policy.
B)Bank of Canada has implemented a contractionary monetary policy.
C)Bank of Canada has abandoned its inflation target.
D)Government of Canada has reduced the money supply.
E)It is not possible to conclude any of the above.

Question 42

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

A)Bank of Canada has implemented a contractionary monetary policy.
B)Bank of Canada has abandoned its inflation target.
C)Government of Canada has reduced the money supply.
D)Bank of Canada has implemented an expansionary monetary policy.
E)Bank of Canada has adjusted the rate it pays on Treasury bills.

Question 43

How does the Bank of Canada set in motion the monetary transmission mechanism?

A)by altering its target for the overnight interest rate
B)by altering the price level
C)by influencing the demand for money directly
D)by influencing the exchange rate directly
E)by influencing aggregate supply directly

Question 44

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

A)increasing the bank rate.
B)increasing the overnight lending rate.
C)decreasing reserves available to the commercial banks.
D)the Bank of Canada reducing its target for the overnight interest rate.
E)the Bank of Canada selling government securities to the public.

Question 45

Most central banks accept that,in the long run,monetary policy has an effect on

A)the level of aggregate demand.
B)the price level and the inflation rate only.
C)the level of investment demand.
D)all real economic variables.
E)real GDP and the price level.

Question 46

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

A)commercial bank reserves are rising.
B)interest rates are changing rapidly.
C)interest rates are constant.
D)money demand is changing in unpredictable ways.
E)money demand is constant.

Question 47

Suppose the economy is experiencing an inflationary gap.Which of the following describes a likely policy response by the Bank of Canada?

A)A contractionary monetary policy which leads to a lower interest rate,reduced investment demand,and a shift to the left of the AD curve.
B)An expansionary monetary policy which leads to an increase in investment demand,and a shift to the right of the AD curve.
C)An expansionary monetary policy which leads to a decrease in investment demand,and a shift to the left of the AD curve.
D)A contractionary monetary policy which leads to an increase in investment demand,and a shift to the right of the AD curve.
E)A contractionary monetary policy which leads to a reduction in investment demand,and a shift to the left of the AD curve.

Question 48

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

A)Bank of Canada has implemented an expansionary monetary policy.
B)Bank of Canada has implemented a contractionary monetary policy.
C)Bank of Canada has abandoned its inflation target.
D)Government of Canada has reduced the money supply.
E)It is not possible to conclude any of the above.

Question 49

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

A)Bank of Canada has implemented an expansionary monetary policy.
B)Bank of Canada has implemented a contractionary monetary policy.
C)Bank of Canada has abandoned its inflation target.
D)Government of Canada has reduced the money supply.
E)It is not possible to conclude any of the above.

Question 50

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

A)Bank of Canada has implemented an expansionary monetary policy.
B)Bank of Canada has implemented a contractionary monetary policy.
C)Bank of Canada has abandoned its inflation target.
D)Government of Canada has reduced the money supply.
E)Bank of Canada has adjusted the rate it pays on Treasury bills.

Question 51

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

A)be very effective in reducing expenditure during inflationary periods and very effective in expanding expenditure during recessionary periods.
B)be very effective in reducing expenditure during inflationary periods and ineffective in expanding expenditure during recessionary periods.
C)be very ineffective in reducing expenditure during inflationary periods and very effective in expanding expenditure during recessionary periods.
D)be very ineffective in reducing expenditure during inflationary periods and very ineffective in expanding expenditure during recessionary periods.
E)be somewhat effective in reducing expenditure during inflationary periods and very ineffective in expanding expenditure during recessionary periods.

Question 52

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

A)increase its target for the money supply.
B)decrease its target for the overnight interest rate.
C)increase its target for the overnight interest rate.
D)decrease the bank rate.
E)buy government securities through open-market operations.

Question 53

The Bank of Canada initially implements an expansionary monetary policy by

A)directly increasing the money supply.
B)selling government securities on the open market.
C)buying government securities on the open market.
D)reducing its target for the overnight interest rate.
E)raising its target for the overnight interest rate.

Question 54

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

A)Bank of Canada has implemented an expansionary monetary policy.
B)Bank of Canada has implemented a contractionary monetary policy.
C)Bank of Canada has abandoned its inflation target.
D)Government of Canada has reduced the money supply.
E)It is not possible to conclude any of the above.

Question 55

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

A)lower the interest rate,raise investment spending,and increase real GDP.
B)raise the interest rate,decrease investment spending,and increase real GDP.
C)raise the interest rate,increase investment spending,and increase real GDP.
D)lower the interest rate,increase investment spending,and reduce real GDP.
E)raise the interest rate,decrease investment spending,and decrease real GDP.

Question 56

When the Bank of Canada reduces the interest rate we call this an expansionary monetary policy.Why?

A)The lower interest rate leads to an increase in the level of national saving.
B)The lower interest rate causes an expansion of money demand.
C)The lower interest rate leads to a rightward shift of the aggregate demand curve.
D)The lower interest rate causes the money demand curve to shift to the right.
E)The lower interest rate causes the money supply curve to shift to the left.

Question 57

When the Bank of Canada increases the interest rate we call this a contractionary monetary policy.Why?

A)The higher interest rate leads to an increase in the level of national saving.
B)The higher interest rate causes a contraction of money demand.
C)The higher interest rate causes the money demand curve to shift to the left.
D)The higher interest rate leads to a leftward shift of the aggregate demand curve.
E)The higher interest rate causes the money supply curve to shift to the right.

Question 58

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

A)Bank of Canada has implemented an expansionary monetary policy.
B)Bank of Canada has implemented a contractionary monetary policy.
C)Bank of Canada has abandoned its inflation target.
D)Government of Canada has reduced the money supply.
E)It is not possible to conclude any of the above.

Question 59

The Bank of Canada initially implements a contractionary monetary policy by

A)directly decreasing the money supply.
B)raising its target for the overnight interest rate.
C)selling government securities on the open market.
D)buying government securities on the open market.
E)reducing its target for the overnight interest rate.

Question 60

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

A)increase its target for the overnight interest rate.
B)increase the bank rate.
C)decrease its target for the overnight interest rate.
D)sell government securities through open-market operations.
E)decrease its target for the money supply.

Question 61

The Bank of Canadaʹs formal policy target is ________. Itʹs current target is to keep the annual inflation rate close to ________%.

A)core inflation; 1
B)core inflation; 0
C)the money supply; 2
D)CPI inflation; 2
E)the money supply; 1

Question 62

It is widely accepted by economists that monetary policy is the most important determinant of a countryʹs

A)level of real GDP.
B)level of potential output.
C)aggregate supply curve.
D)long-run rate of inflation.
E)long-run rate of economic growth.

Question 63

Many central banks have established formal targets for the rate of inflation because of the following fundamental observations about economic relationships: 1.there are high costs associated with inflation
2.high inflation causes high unemployment
3.monetary policy is the cause of sustained inflation

A)1 only
B)2 only
C)3 only
D)1 and 3 only
E)1,2,and 3

Question 64

Most central banks in the developed countries focus their attention on

A)the elimination of output gaps.
B)reducing unemployment.
C)the reduction and control of inflation.
D)alleviating the harmful effects of inflation.
E)the growth of potential output.

Question 65

The long-run target currently used by the Bank of Canada is to set

A)M2 = real GDP/M1.
B)a long-run target range for the overnight lending rate.
C)a long-run target range for the Canadian-U.S.exchange rate.
D)a long-run target range for the 5-year mortgage rate.
E)a long-run target range for the inflation rate.

Question 66

In an effort to maintain inflation at its targeted level the Bank of Canada designs its policies,in the short run,to

A)eliminate all unemployment.
B)keep real GDP close to potential output.
C)minimize the growth of the money supply.
D)allow the aggregate supply curve to close any output gaps.
E)eliminate all negative shocks to the economy.

Question 67

Which of the following describes the cause of a sustained inflation?

A)the monetary transmission mechanism
B)an aggregate demand shock significant enough to cause a substantial rise in the price level
C)continual monetary expansion
D)an aggregate supply shock significant enough to cause a substantial rise in the price level
E)simultaneous AD and AS shocks

Question 68

Inflation targeting

A)is irrelevant to the stability of the economy because of the long-run neutrality of money.
B)is a destabilizing policy because it requires the Bank of Canada to engage in inappropriate policy responses.
C)is a stabilizing policy because the Bank of Canadaʹs policy adjustments act to stabilize real GDP growth.
D)should be replaced with fiscal policy targeting because of the long-run neutrality of money.
E)creates output gaps that must be then offset with fiscal policy stabilizers.

Question 69

High inflation is costly to firms and individuals.Of the following,who is most adversely affected by high inflation?

A)a homeowner with a 25-year fixed-rate mortgage
B)a student with student loans repayable in nominal terms at a fixed rate of interest
C)a student with student loans repayable on an indexed basis at a variable rate of interest
D)a senior whose retirement income is an indexed pension plan
E)a senior whose retirement income is fixed in dollar terms

Question 70

The economic variables that the Bank of Canada tries to influence are ________ in the short run and ________ in the long run.

A)the distribution of income; the unemployment rate
B)real GDP; the path of the price level
C)the distribution of income; economic efficiency
D)real GDP; the exchange rate
E)the exchange rate; the rate of inflation

Question 71

One problem with focusing on the CPI when conducting monetary policy is that

A)many elements in the CPI change for reasons unrelated to the state of the Canadian economy.
B)it is closely related to the value of M2.
C)changes in monetary policy have little effect on the CPI,especially in the long run.
D)the CPI is too stable to accurately reflect the changes occurring in the Canadian economy.
E)the CPI distorts the value of commercial bank reserves.

Question 72

Given its existing policy regime of ʺinflation targeting,ʺ the Bank of Canada would likely react to a large negative AD shock by

A)raising the bank rate.
B)selling bonds on the open market.
C)increasing its target for the overnight interest rate.
D)decreasing its target for the overnight interest rate.
E)ignoring the shock and allowing the economy to adjust.

Question 73

High and uncertain inflation is damaging to the economy because

A)the price system is no longer capable of effectively signalling changes in relative scarcity through changes in relative prices.
B)individuals who receive their incomes in fixed nominal terms are made worse off.
C)there can be unexpected reallocations of real income between workers and firms.
D)there can be unexpected reallocations of real income between borrowers and lenders.
E)All of the above.

Question 74

In the short run the Bank of Canada aims to________, in an effort to ________.

A)enhance any positive shocks; keep inflation within its target band
B)reduce any positive or negative output gaps; keep inflation close to the official target
C)ignore any shocks as they are automatically adjusting; keep GDP growth constant
D)keep actual output within 1%-3% of potential output; keep the money supply growing at a constant rate
E)ignore any shocks as they are automatically adjusting; keep inflation within its target band

Question 75

Given its existing policy regime of ʺinflation targeting,ʺ the Bank of Canada would likely react to a large positive aggregate demand shock by

A)lowering the bank rate.
B)buying bonds from the open market.
C)increasing its target for the overnight interest rate.
D)decreasing its target for the overnight interest rate.
E)ignoring the shock and allowing the economy to adjust.

Question 76

Consider the following statement about inflation targeting: A policy of inflation targeting acts as an automatic stabilizer in the economy,just like the automatic fiscal stabilizers.Choose the most appropriate response to this statement.The statement is

A)true,because an inflationary gap is met with a contractionary monetary policy.
B)true,because a recessionary gap is met with an expansionary monetary policy.
C)not true,because inflation targeting requires active policy decisions by the Bank of Canada,whereas fiscal stabilizers need no policy implementation.
D)not true,because inflation targeting automatically maintains inflation within the target range,whereas fiscal stabilizers require government policy decisions.
E)true,because inflation targeting and fiscal stabilizers are essentially the same policy tool.

Question 77

Suppose output is at its potential level and then there is a sudden increase in food and energy prices.This increase

A)makes inflation targeting easier because it makes these problems less relevant.
B)makes inflation targeting harder because these are closely related to excess demand in the economy.
C)would be unlikely to lead to an immediate policy response because it would not appear in ʺcoreʺ inflation.
D)would be offset by a decline in the Canadian dollar,making these price increases irrelevant.
E)is closely related to changes in core inflation so the Bank of Canada uses these for targeting inflation.

Question 78

Because of the volatility of food and energy prices,the Bank of Canada pays more attention in the short run to changes in ________ than to changes in ________.

A)core inflation; total CPI inflation
B)total CPI inflation; core inflation
C)total CPI inflation; inflation of the GDP deflator
D)inflation of the GDP deflator; total CPI inflation
E)the nominal exchange rate; the real exchange rate

Question 79

An example of how inflation targeting by the Bank of Canada helps to stabilize the economy is

A)firms and households are aware of the announced inflation target and adjust their behaviour so as to maintain this level of actual inflation.
B)when a recessionary gap reduces the rate of inflation (below the target level)the Bank of Canada will implement an expansionary monetary policy,which helps to close the gap.
C)when the actual inflation rate falls below the targeted level of inflation,then commercial banks automatically increase deposit creation.
D)when an output gap opens in the economy,the inflationary target adjusts to close the gap.
E)when an output gap opens in the economy,the Bank of Canada chooses the inflation target appropriate for closing the gap.

Question 80

As of 2015,the Bank of Canadaʹs policy objective is to maintain inflation at or near the target of

A)0%.
B)1%.
C)2%.
D)3%.
E)4%.