Deck 29: Monetary Policy in Canada

Question 1

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

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

Answer 1

E

Question 2

The Bank of Canada conducts its open- market operations directly in response to

A)changes in aggregate demand.
B)orders from Parliament.
C)changes in the price level.
D)the changing demand for currency from the commercial banks.
E)its announced changes in the money supply.

Answer 2

D

Question 3

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

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

Answer 3

A

Question 4

In 1980, the annual inflation rate in Canada was

A)over 12 percent.
B)roughly 8 percent.
C)roughly 6 percent.
D)roughly 2 percent.
E)roughly zero.

Question 5

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

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

Question 6

One reason that the Bank of Canada does not try to influence the money supply directly is that

A)the Bank of Canada has many other policy tools with which it can influence aggregate demand.
B)because the investment demand curve is almost vertical, any change in the interest rate resulting from a change in money supply would have little or no effect on desired investment expenditure.
C)because the money demand curve is almost horizontal, changes in the money supply would have little or no effect on the interest rate.
D)the Bank of Canada does not have the mandate to change the money supply.
E)the slope of the money demand curve is not precisely known, and so the effect on the interest rate of a change in money supply is uncertain.

Question 7

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

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

Question 8

Suppose the Bank of Canada raises its target for the overnight interest rate and longer- term rates in the market rise as a result. Households' and firms' demand for loans from the commercial banks would . In order to accommodate this change, the commercial banks require .

A)rise; more currency
B)rise; more government securities
C)remain stable; no change to their reserves
D)fall; fewer cash reserves
E)fall; more cash reserves

Question 9

In practise, the Bank of Canada uses monetary policy to reduce undesirable fluctuations in real GDP by

A)controlling government spending.
B)controlling business investment expenditures directly.
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 10

If an economist supports targeting inflation as opposed to monetary fine- tuning, this economist probably believes that time lags in the implementation of monetary policy are

A)predictable in their short- run effects but unpredictable in the long run.
B)long and unpredictable.
C)short but predictable.
D)long but predictable.
E)short but unpredictable.

Question 11

The Bank of Canada implements an expansionary monetary policy by

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

Question 12

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

A)is closely related to changes in core inflation so the Bank of Canada uses these for targeting inflation.
B)is not crucial for inflation targeting because the Bank of Canada does not include these in its targets for "core" inflation.
C)would be offset by a decline in the Canadian dollar, making these price increases irrelevant.
D)makes inflation targeting easier because it makes these problems less relevant.
E)makes inflation targeting harder because these are closely related to excess demand in the economy.

Question 13

Most economists now accept the proposition that

A)an ideal monetary policy would allow the money supply to grow at the same rate of growth as nominal national income.
B)to reduce the long- run rate of inflation there must be a sustained monetary contraction.
C)lowering the Bank Rate will have no effect on desired investment in the short run but will have a direct effect on core inflation.
D)monetary policy leaves real GDP and the overnight lending rate unaffected in the short run.
E)monetary policy is the only policy tool available for influencing aggregate demand.

Question 14

In 2007 and 2008, Canada was affected by the global financial crisis that had begun with the U.S. housing collapse. By 2009, the Canadian economy had entered a recession, largely due to a reduction in investment and a . The policy objective for the Bank of Canada and the government at this time was to .

A)fall in consumption; shift the AD curve to the left to close the recessionary output gap
B)fall in consumption; shift the AD curve to the right to close the inflationary output gap
C)fall in housing starts; shift the AD curve to the left to close the recessionary output gap
D)fall in net exports; shift the AD curve to the right to close the recessionary output gap
E)fall in net exports; shift the AS curve to close the inflationary output gap

Question 15

Long time lags in the effectiveness of monetary policy

A)decrease the growth of the money supply.
B)decrease the effectiveness of the Bank of Canada's fine tuning.
C)decrease the destabilizing side- effects of Bank of Canada's monetary policy.
D)increase the growth of the money supply.
E)increase the effectiveness of the Bank of Canada's fine tuning.

Question 16

Which of the following events would justify the Bank of Canada implementing an expansionary monetary policy, while maintaining its commitment to its inflation target?

A)The appreciation of the Canadian dollar due to increases in the world prices of oil and raw materials given the fact that Canada is a major producer and exporter of these goods.
B)The OPEC oil- price shocks that result in inflation.
C)The U.S. economy increasing its demand for Canadian goods and services.
D)The stock market crash following the terrorist attacks on September 11, 2001.
E)The depreciation of the Canadian dollar due to persistent current account deficits of Canada.

Question 17

Any central bank, including the Bank of Canada, can implement its monetary policy by directly influencing either or , but not both.

A)the price level; the interest rate
B)money supply; money demand
C)aggregate supply; aggregate demand
D)the money supply; the interest rate
E)aggregate demand; the interest rate

Question 18

The Bank of Canada implements a contractionary monetary policy by

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

Question 19

High and uncertain inflation is damaging to the economy because

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

Question 20

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

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

Question 21

The Bank of Canada chooses to influence interest rates directly rather than influencing the money supply directly because

A)the deposit creation mechanism in the banking system is outside the full control of the Bank of Canada.
B)the former method does not require knowledge of the position of the money demand curve.
C)it is easier to communicate policy actions to the public by setting the interest rate.
D)the former method does not require knowledge of the slope of the money demand curve.
E)all of the above.

Question 22

When the Bank of Canada enters the open market and buys or sells government securities, we refer to this as

A)changing the target reserve ratio.
B)open- market operations.
C)commercial lending.
D)monetary policy.
E)setting the target ratio.

Question 23

In practice, the Bank of Canada implements its monetary policy by

A)setting the money supply.
B)influencing the slope of the money demand curve.
C)directly influencing the overnight interest rate.
D)directly influencing the excess reserves in the commercial banking system.
E)directly influencing the price level.

Question 24

Inflation that is fully anticipated by workers, firms, and consumers

A)is hard to predict.
B)leads to reductions in real incomes for all workers.
C)improves the efficiency of the price system.
D)does not impact the purchasing power of individuals whose incomes are fully indexed to inflation.
E)has no real or nominal effects in the economy.

Question 25

Suppose the Bank of Canada announces its target for the overnight interest rate at 2.5 percent. In that case, the Bank of Canada is willing to lend to commercial banks at _ percent and is willing to pay percent on deposits it receives from commercial banks.

A)2.25; 2.5
B)2.5; 2.5
C)2.5; 2.0
D)2.75; 2.25
E)3.5; 1.5

Question 26

Suppose Canadian real GDP is equal to potential GDP. A significant and sustained appreciation of the Canadian dollar on the foreign- exchange market then requires the Bank of Canada to

A)engage in contractionary monetary policy to counter the rise in the dollar.
B)increase the target band for the inflation rate.
C)increase the target band for the overnight lending rate.
D)engage in expansionary monetary policy to counter the rise in the dollar.
E)identify the cause of the change in the exchange rate before taking any action to adjust policy.

Question 27

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

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

Question 28

Most central banks, including the Bank of Canada, implement monetary policy by

A)influencing the demand for money directly.
B)controlling the process of deposit creation in the commercial banking system.
C)controlling the money supply directly.
D)influencing investment demand directly.
E)influencing a short- term interest rate directly.

Question 29

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

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

Question 30

In 1982, when the Bank of Canada was focusing its attention on reducing the growth rate of the money supply, an unplanned surge in led to an unintended tight monetary policy which caused .

A)money supply; a drop in the overnight lending rate and increased investment
B)money demand; decreased inflation and a serious recession
C)money supply; the Bank of Canada to apologize to the public for its policy error
D)desired investment; the Bank of Canada to adopt a core inflation targeting policy
E)desired investment; inflation to increase

Question 31

An expansionary monetary policy by the Bank of Canada could include

A)a reduction of the Bank's target for the overnight interest rate.
B)an open- market sale of government securities.
C)moral suasion to reduce lending by commercial banks.
D)moral suasion to increase the commercial banks' desired reserves.
E)none of the above would be expansionary.

Question 32

Which of the following goods are included in Canada's measure of "core inflation"?

A)coffee
B)fresh vegetables
C)excise tax on gasoline
D)natural gas
E)a new car

Question 33

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 an output gap opens in the economy, the inflationary target adjusts to close the gap.
C)when an output gap opens in the economy, the Bank of Canada chooses the inflation target appropriate for closing the gap.
D)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.
E)when the actual inflation rate falls below the targeted level of inflation, then commercial banks automatically increase deposit creation.

Question 34

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)increasing reserves at the commercial banks by $1 million.
C)selling $1 million worth of government securities on the open market.
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 35

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 selling government securities to the Bank of Canada in exchange for cash, with which they can extend new loans.
B)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.
C)an increase in the demand for loans by borrowing cash from the Bank of Canada with which they can extend new loans.
D)a decrease in the demand for loans by selling government securities to the Bank of Canada and calling in existing loans.
E)an increase in the demand for loans by buying government securities from the Bank of Canada, against which they can extend new loans.

Question 36

The short- run objective of the Bank of Canada is to ; the long- run objective is to _.

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

Question 37

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

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

Question 38

the price level.

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

Question 39

It is widely accepted by economists that monetary policy is the most important determinant of a country's

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

Question 40

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

Question 41

Suppose Canadian real GDP is equal to potential GDP. An appreciation of the Canadian dollar then implies that the Bank of Canada should engage in

A)a tightening of monetary policy because of the excess demand for Canadian products that is creating the appreciation.
B)either a contractionary or an expansionary policy, depending on the cause of the appreciation.
C)no change in monetary policy because the exchange rate is always allowed to float freely.
D)a loosening of monetary policy because of the excess demand for Canadian products that is creating the appreciation.
E)an increase in inflation because of the higher cost of imports.

Question 42

Suppose the actual overnight interest rate is 4 percent. If the Bank of Canada lowers its target for the overnight rate to 3.75 percent, the money supply will eventually

A)decrease 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 a decrease in the demand for new loans.
D)decrease as a result of an increase in excess reserves in the banking system.
E)increase as a result of open- market operations.

Question 43

The term structure of interest rates refers to

A)the variance of the different interest rates available in the economy.
B)the composition of the market interest rate.
C)the variation of the market interest rate over the span of one year.
D)the pattern of interest rates that corresponds to the varying terms to maturity of government securities.
E)the general observation that the yield on 30- year government bonds is less than the yield on 90- day Treasury bills.

Question 44

In 2007 and 2008, Canada was affected by the global financial crisis that had begun with the U.S. housing collapse. By early 2009, the Canadian economy was in a recession with Y < Y*. What economic policies were implemented to close the output gap?

A)expansionary monetary policy
B)contractionary monetary policy and contractionary fiscal policy
C)expansionary fiscal policy
D)expansionary monetary policy and expansionary fiscal policy
E)contractionary monetary policy and expansionary fiscal policy

Question 45

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

Question 46

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

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

Question 47

If the Bank of Canada chooses to expand the money supply directly, it could

A)sell some of its foreign currency assets.
B)reduce its deposits at commercial banks.
C)sell government securities on the open market.
D)buy government securities on the open market.
E)change the price level.

Question 48

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 Canadian government requires long- term loans.
C)the commercial banks may choose not to hold excess reserves.
D)the money demand function may be unstable.
E)the Bank of Canada can print more money.

Question 49

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

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

Question 50

Inflation targeting

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

Question 51

The Bank of Canada determines the "bank rate" by setting it equal to the upper end of a 50 basis- point- range that the

A)Bank of Canada announces as a target range for the overnight interest rate.
B)Bank of Canada announces as the target range for the five- year mortgage rate.
C)Government of Canada pays for short term loans to meet interest payments on the public debt.
D)Bank of Canada announces as its target for the core rate of inflation.
E)Bank of Canada announces as a target range for the exchange rate between the Canadian Dollar and the US Dollar.

Question 52

Until 2011, the Bank of Canada's policy objective is (was)to maintain inflation at or near the target of

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

Question 53

The decision by the Bank of Canada and many other central banks to target the rate of inflation partly reflects the evidence of the

A)power of the overnight lending rate to affect long- run investment.
B)long- run neutrality of money.
C)link between the output gap and the money supply.
D)link between the money supply and the exchange rate.
E)power of the overnight interest rate to affect consumer borrowing.

Question 54

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

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

Question 55

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

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

Question 56

Time lags in monetary policy can cause

A)short- term monetary policy to work more effectively than long- term targeting.
B)difficulty in the timing of appropriate policy and can even lead to destabilization.
C)an expansionary policy to have too little an effect because it takes much longer to work than was expected by policymakers.
D)monetary policy to work more slowly and more smoothly than was initially predicted by economists.
E)monetary expansions to work very quickly but cause monetary contractions to work very slowly.

Question 57

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

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

Question 58

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

A)purchase government securities in the open market.
B)adjust the rate paid on Treasury bills.
C)increase its target for the overnight rate.
D)lower the reserve requirement.
E)increase the commercial banks' required reserves.

Question 59

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

Question 60

Suppose Canadian real GDP is currently equal to potential GDP. Then, because of events elsewhere in the world, European investors decide to hold fewer Canadian financial assets, which leads to a sustained depreciation of the Canadian dollar . If the Bank of Canada is committed to its inflation target then it should

A)implement an expansionary monetary policy by decreasing its target for the overnight interest rate.
B)implement an expansionary monetary policy by increasing its target for the overnight interest rate.
C)not intervene in the economy at all since this shock will not have any real effects in the short run.
D)implement a contractionary monetary policy by decreasing its target for the overnight interest rate.
E)implement a contractionary monetary policy by increasing its target for the overnight interest rate.

Question 61

During a period of renewed inflation fears in 1988, the governor of the Bank of Canada, Mr. John Crow, announced that monetary policy would henceforth be guided more by

A)unemployment levels and the level of prices.
B)the level of real income growth and "price stability".
C)exchange rate targets since depreciation of the Canadian dollar tends to be inflationary.
D)real GDP growth.
E)the goal of long- term "price stability".

Question 62

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

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

Question 63

In Canada, open- market operations are

A)no longer carried out.
B)conducted to enforce the reserve requirements of commercial banks.
C)loans made by the Bank of Canada to the commercial banks.
D)government actions aimed at creating competition within the banking industry.
E)the buying and selling of government securities by the Bank of Canada.

Question 64

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

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

Question 65

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

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

Question 66

In practice, it is not possible for the Bank of Canada to control the money supply because

A)it cannot control the amount of cash reserves that are injected into or withdrawn from the banking system.
B)the resulting effects on the value of the Canadian dollar are difficult to predict.
C)it does not have the legal power to do so.
D)it cannot control the process of deposit creation carried out by the commercial banks.
E)none of the above-the Bank of Canada could control the money supply if it chose to do so.

Question 67

The bank rate is the

A)interest rate at which the Bank of Canada will lend funds to the Canadian government.
B)interest rate at which the Bank of Canada will lend funds to commercial banks.
C)same as a margin requirement.
D)interest rate that the Bank of Canada pays on deposits from the commercial banks.
E)interest rate that commercial banks charge their best customers.

Question 68

If the Bank of Canada wants to influence real economic variables in the short run, it uses

A)its only policy instrument-the overnight interest rate target-to influence aggregate demand.
B)policy variables such as the money supply to influence investment and aggregate supply.
C)policy instruments such as the exchange rate and investment to influence the economy.
D)policy variables such as the exchange rate and investment to influence aggregate demand.
E)policy variables such as open- market operations to influence aggregate demand.

Question 69

Suppose Canadian real GDP is currently equal to potential GDP. Then the Canadian dollar depreciates due to the reduced demand by European producers to purchase Canadian- made raw materials. If the Bank of Canada is committed to its inflation target then it should

A)not intervene in the economy at all since this shock will not have any real effects in the short run.
B)implement an expansionary monetary policy by increasing its target for the overnight interest rate.
C)implement a contractionary monetary policy by increasing its target for the overnight interest rate.
D)implement a contractionary monetary policy by decreasing its target for the overnight interest rate.
E)implement an expansionary monetary policy by decreasing its target for the overnight interest rate.

Question 70

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

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

Question 71

In 2007 and 2008, Canada was affected by the global financial crisis that had begun with the U.S. housing collapse. What actions did the Bank of Canada take between the fall of 2007 and the end of 2008 in an attempt to maintain the level of economic activity in Canada? The Bank of Canada

A)purchased "toxic" assets from Canadian commercial banks and implemented a large fiscal stimulus program.
B)maintained its target for the overnight rate and made short- term loans to financial institutions more accessible.
C)reduced its target for the overnight rate by over 3.5 percentage points and made short- term loans to financial institutions more accessible.
D)reduced its target for the overnight rate by over 5 percentage points and purchased "toxic" assets from Canadian commercial banks.
E)implemented a large fiscal stimulus program to counteract the sharp rise in interest rates that had occurred.

Question 72

Suppose Canadian real GDP is equal to potential GDP. A significant and sustained appreciation of the Canadian dollar would likely lead the Bank to engage in an expansionary monetary policy if the Bank's policy experts traced the cause of the appreciation to

A)an increase in the desire of non- residents to purchase more Canadian goods and services.
B)a decrease in the overnight lending rate.
C)a recession in Canada.
D)a reduction in Canada's core inflation rate.
E)an increase in the desire of non- residents to purchase Canadian financial assets.

Question 73

The interest rate that commercial banks charge each other for the shortest period of borrowing or lending is called the

A)preferred lending rate.
B)term interest rate.
C)bank rate.
D)overnight interest rate.
E)prime rate.

Question 74

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

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

Question 75

If the Bank of Canada were required to gain approval for all changes in monetary policy from Parliament before implementing them, this would result in

A)longer time lags in monetary policy.
B)permanently higher unemployment.
C)temporary reductions in the interest rate.
D)higher inflation in the long run.
E)permanently higher exchange rates for the Canadian dollar.

Question 76

During the period of economic recovery between 1983 and 1987, the main challenge for the Bank of Canada was to

A)stabilize the unemployment rate.
B)increase the money supply so that only a mild form of inflation would reappear.
C)decrease the money supply to dampen inflationary expectations.
D)accommodate the recovery, and the associated growth in money demand, without increasing the money supply so much as to refuel inflation.
E)stabilize the exchange rate between the U.S. and Canadian dollars.

Question 77

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

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

Question 78

What is the policy response by the Bank of Canada to an inflationary gap in one region of Canada (e.g. the West)when at the same time a recessionary gap exists in another region of Canada (e.g. Ontario)?

A)There are automatic stabilizers inherent in monetary policy that allow the policy to adjust to close the output gap.
B)The Bank of Canada implements monetary policy in each region of Canada as required.
C)The Bank of Canada responds to the average level of inflation in the country and implements a single monetary policy.
D)Each regional office of the Bank of Canada implements the appropriate monetary policy for that region.
E)The Bank of Canada consults with the commercial banks on the appropriate level of deposit creation for each region of the country.

Question 79

Economists at the Bank of Canada estimate that time lags in monetary policy imply that

A)monetary policy can cause changes in core inflation to occur in 9 to 12 months and changes in real GDP to occur in 18- 24 months.
B)monetary policy can cause changes in real GDP to occur in 9- 12 months and changes in core inflation to occur in 18- 24 months.
C)monetary policy is totally ineffective in changing core inflation rates in the long run.
D)monetary policy is totally ineffective in changing overnight lending rates in the short run.
E)monetary policy can cause changes in core inflation to occur in 9- 12 months and changes in the exchange rate to occur in 18- 24 months.

Question 80

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 prime rate and are short- term in nature.
C)made to large non- bank corporations.
D)made to commercial banks at the bank rate.
E)the Bank's major policy instrument.