Deck 13: Monetary Policy

Question 1

Assume that the Bank of Canada's policy is to keep the price level from either rising or falling.If aggregate supply decreases in the economy,the Bank of Canada:

A)will have to decrease interest rates if it wishes to keep the price level from falling
B)will have to increase the money supply if it wishes to keep the price level from falling
C)will have to decrease the money supply if it wishes to keep the price level from rising
D)can keep the price level stable without altering the money supply or interest rate
E)will have to increase the money supply if it wishes to keep the price level from rising

Answer 1

C

Question 2

When the Bank of Canada engages in an easy money policy,the interest rate received on bonds tends to:

A)fall
B)rise
C)remain constant
D)move in the same direction as the bonds' price
E)move in a random fashion

Answer 2

A

Question 3

An increase in the money supply will tend to:

A)lower the interest rate and lower equilibrium real output
B)lower the interest rate and increase equilibrium real output
C)increase the interest rate and increase equilibrium real output
D)increase the interest rate and lower equilibrium real output
E)keep the interest rate and equilibrium real output the same

Answer 3

B

Question 4

If the Bank of Canada wants to reduce bank lending,it typically:

A)sells bonds in the open market
B)buys bonds in the open market
C)lowers the target overnight rate
D)issues a directive demanding that banks call in loans
E)issues a press release asking banks to call in loans

Question 5

In terms of the aggregate demand and aggregate supply model,an expansionary monetary policy is designed to shift the aggregate:

A)demand curve rightward
B)demand curve leftward
C)supply curve rightward
D)supply curve leftward
E)demand and aggregate supply curves leftward

Question 6

The bank rate is the interest rate at which:

A)chartered banks lend to large corporations
B)the Bank of Canada lends to large corporations
C)near banks lend to home builders
D)the Bank of Canada lends to CPA members
E)chartered banks lend to ordinary customers

Question 7

Monetary policies that cause an increase in the money supply:

A)raise the interest rate, decrease spending on investment and consumer durables, and shift aggregate demand leftward
B)lower the interest rate, decrease spending on investment and consumer durables, and shift aggregate demand rightward
C)lower the interest rate, increase spending on investment and consumer durables, and shift aggregate demand leftward
D)raise the interest rate, increase spending on investment and consumer durables, and shift aggregate demand rightward
E)lower the interest rate, increase spending on investment and consumer durables, and shift aggregate demand rightward

Question 8

If the demand for money increases and the monetary authorities want interest rates to remain unchanged,which of the following would be the most appropriate policy?

A)recall currency from circulation
B)reduce tax rates
C)buy bonds in the open market
D)raise the target overnight rate
E)sell bonds in the open market

Question 9

If the economy's potential output is $550 billion,the monetary authorities should seek to:

A)establish the money supply at $50 billion
B)establish the money supply at $80 billion
C)shift the aggregate supply curve to the left
D)establish the equilibrium interest rate at 3 percent
E)shift the aggregate supply curve to the right

Question 10

The money supply (M),the interest rate (r),and aggregate demand (AD)are related such that a(n):

A)reduction in M reduces r and the reduction in r increases AD
B)reduction in M increases r and the increase in r decreases AD
C)increase in M increases r and the increase in r decreases AD
D)increase in M reduces r and the reduction in r decreases AD
E)increase in M increases r and the increase in r increases AD

Question 11

When the Bank of Canada engages in a tight money policy,the price of bonds tends to:

A)fall
B)rise
C)remain constant
D)move in the same direction as the bonds' interest rate
E)move in a random fashion

Question 12

Which of the following statements best describes the cause-and-effect chain of an expansionary monetary policy?

A)A decrease in the money supply will lower the interest rate, increase aggregate demand, and increase real output.
B)A decrease in the money supply will raise the interest rate, decrease aggregate demand, and decrease real output.
C)An increase in the money supply will raise the interest rate, decrease aggregate demand, and decrease real output.
D)An increase in the money supply will lower the interest rate, decrease aggregate demand, and increase real output.
E)An increase in the money supply will lower the interest rate, increase aggregate demand, and increase real output.

Question 13

The monetary authorities signal changes in monetary policy by:

A)selling bonds in the open market
B)buying bonds in the open market
C)changing the 50-basis-point range for the overnight rate
D)issuing a press release
E)informing the government of their decision

Question 14

The interest rate at which the Bank of Canada lends to CPA members is called:

A)the prime rate
B)the short-term rate
C)the long-term rate
D)the government bond rate
E)the bank rate

Question 15

If the economy's potential output is $550 billion and the equilibrium interest rate is 7 percent:

A)there is an inflationary gap of $50 billion
B)the monetary authorities should increase the money supply from $50 billion to $110 billion
C)the economy is operating at its potential output
D)there is a recessionary gap of $200 billion
E)there is an inflationary gap of $200 billion

Question 16

Which of the following is not a tool of monetary policy?

A)an increase in the target overnight rate
B)an open market purchase of bonds
C)changes in tax rates
D)an open market sale of bonds
E)a decrease in the target overnight rate

Question 17

Which of the following statements best describes the Bank of Canada? It is:

A)a publicly owned and publicly controlled central bank, whose basic goal is to provide income for the Government of Canada
B)a privately owned and publicly controlled central bank, whose basic goal is to earn profits for its owners
C)a publicly owned and publicly controlled central bank, whose basic goal is to control the money supply and interest rates in promoting the general economic welfare
D)a privately owned and publicly controlled central bank, whose basic function is to minimize the risks in chartered banking in order to make it a reasonably profitable industry
E)a privately owned and privately controlled bank, whose basic goal is to earn profits for its owners

Question 18

Assume that the Bank of Canada's policy is to stabilize the interest rate.If the economy begins to expand,the Bank of Canada:

A)would have to increase the money supply to keep the interest rate from falling
B)would have to decrease the money supply to keep the interest rate from rising
C)would have to increase the money supply to keep the interest rate from rising
D)can keep the interest rate stable without altering the money supply
E)will have to accept a lower interest rate if it does not alter the money supply

Question 19

Which of the following will tend to increase bank reserves?

A)the purchase of bonds in the open market by the Bank of Canada
B)federal tax collections
C)an increase in the target overnight rate
D)the sale of bonds in the open market by the Bank of Canada
E)a budget deficit by the federal government

Question 20

In terms of the aggregate demand and aggregate supply model,the sale of bonds by the Bank of Canada to chartered banks will:

A)increase aggregate supply
B)decrease aggregate supply
C)increase aggregate demand
D)decrease aggregate demand
E)increase both aggregate demand and aggregate supply

Question 21

An increase in aggregate demand will:

A)shift the curve to the right
B)shift the curve to the left
C)move the economy along the curve from point a to point b
D)move the economy along the curve from point b to point a
E)have no impact on the curve or the economy's position on it

Question 22

If there were an inflationary gap,the proper government policies would involve a government:

A)deficit, the purchase of bonds in the open market, and a higher target overnight rate
B)deficit, the sale of bonds in the open market, and a higher target overnight rate
C)surplus, the sale of bonds in the open market, and a higher target overnight rate
D)surplus, the purchase of bonds in the open market, and a lower target overnight rate
E)balanced budget and lower target overnight rate

Question 23

The curve in this graph is known as a(n):

A)Laffer curve
B)wage rate-inflation curve
C)aggregate demand curve
D)labour demand curve
E)Phillips curve

Question 24

Stagflation refers to a(n):

A)increase in inflation accompanied by constant or expanding unemployment
B)decline in the price level accompanied by increases in real output and employment
C)simultaneous increase in output and the price level
D)simultaneous reduction in output and the price level
E)period of falling inflation

Question 25

Assume that the reserve ratio is 5 percent and the Bank of Canada buys a $10 000 bond from a member of the public.As a result:

A)bank reserves are decreased by $10 000
B)the money supply immediately declines by $9500
C)desired bank reserves are increased by $9500
D)the money supply is immediately increased by $10 000
E)the money supply immediately declines by $500

Question 26

If the Bank of Canada wants to lower the interest rate,it should:

A)raise the target overnight rate
B)try to recall currency from circulation
C)buy bonds in the open market
D)sell bonds in the open market
E)try to encourage banks to reduce their lending

Question 27

Which of the following allegedly contributed to the reversal of stagflation between 1983 and 2008?

A)oil prices rose during the mid-1980s
B)the pace of technological change gradually accelerated during this period
C)labour unions became more prevalent in the Canadian economy
D)the Bank of Canada adopted a highly expansionary monetary policy during the first part of this period
E)the Canadian government adopted a highly expansionary fiscal policy during the latter part of this period

Question 28

Which of the following allegedly contributed to the 1973-1982 stagflation?

A)decreases in wage demands
B)a dramatic increase in oil prices
C)an accelerating pace of technological change
D)a marked decrease in the money supply within Canada
E)highly contractionary fiscal policy by the Canadian government

Question 29

When the Bank of Canada sells a bond to a member of the public:

A)the money supply is reduced
B)the money multiplier is not relevant
C)the lending ability of the banking system is increased
D)bank reserves stay the same
E)the money multiplier falls

Question 30

The traditional Phillips curve suggests a conflict or tradeoff between:

A)price level stability and income equality
B)economic growth and income equality
C)full employment and income equality
D)economic growth and full employment
E)full employment and price level stability

Question 31

Open market operations are defined as:

A)purchases of stocks in a stock exchange
B)the purchase or sale of bonds by the Bank of Canada
C)central bank lending to banks
D)the specifying of margin requirements on stock purchases
E)central bank borrowing from banks

Question 32

Which of the following statements is not correct?

A)The money supply increases when the Bank of Canada buys bonds from households or businesses.
B)Excess reserves are the amount by which actual reserves exceed desired reserves.
C)Chartered banks increase the money supply when they lend to households or businesses.
D)Bank reserves are an asset to banks but a liability to the Bank of Canada.
E)The money supply decreases when the Bank of Canada buys bonds from households or businesses.

Question 33

Monetary policy is thought to be:

A)equally effective in moving the economy out of a recession as in controlling inflation
B)more effective in moving the economy out of a recession than in controlling inflation
C)more effective in controlling inflation than in moving the economy out of a recession
D)only effective in moving the economy out of a recession
E)only effective in controlling inflation

Question 34

Which of the following statements best describes the relationship portrayed by this curve?

A)The demand for labour is high when the inflation rate is low.
B)The inflation rate is high when the unemployment rate is high.
C)The rate of increase in the price level and the unemployment rate are inversely related.
D)The rate of increase in the price level and the unemployment rate are directly related.
E)The demand for labour is low when the unemployment rate is low.

Question 35

The traditional Phillips curve suggests that,if an expansionary fiscal or monetary policy is used to stimulate output and employment:

A)unemployment may actually increase
B)prices may fall
C)inflation may result
D)the natural rate of unemployment may be affected
E)prices tend to stay the same

Question 36

Which of the following statements best describes a decision by policy-makers that moves the economy from point b to point a?

A)Policy-makers are using an easy money policy and/or a budget deficit, thereby accepting more unemployment to reduce the inflation rate.
B)Policy-makers are using a tight money policy and/or a budget surplus, thereby accepting a higher inflation rate to reduce unemployment.
C)Policy-makers are using an easy money policy and/or a budget deficit, thereby accepting a higher inflation rate to reduce unemployment.
D)Policy-makers are using a tight money policy and/or a budget surplus, thereby accepting more unemployment to reduce the inflation rate.
E)Policy-makers are using an easy money policy and/or a budget surplus, thereby accepting more unemployment to reduce the inflation rate.

Question 37

Open market operations change:

A)the size of the money multiplier, but not bank reserves
B)bank reserves, but not the size of the money multiplier
C)neither bank reserves nor the size of the money multiplier
D)both bank reserves and the size of the money multiplier
E)the target overnight rate but not the interest rate on bonds

Question 38

The basic problem portrayed by the traditional Phillips curve is:

A)that an increase in aggregate demand sufficiently large to result in full employment may also cause inflation
B)that changes in the composition of total labour demand tend to cause deflation
C)that unemployment tends to increase at the same time that the general price level is rising
D)the possibility that automation will increase the level of structural unemployment
E)that changes in the composition of total labour demand tend to cause inflation

Question 39

Which of the following would be the most likely cause of cost-push inflation?

A)more aggressive wage bargaining by labour unions
B)a reduction in raw material prices
C)a decline in the number of workers belonging to labour unions
D)more rapid increases in labour productivity
E)an increase in consumption spending

Question 40

An easy money policy may be less effective than a tight money policy because:

A)the Bank of Canada is always willing to make loans to CPA members that are short of reserves
B)fiscal policy always works at cross purposes with an easy money policy
C)an easy money policy has longer lags associated with its use
D)chartered banks may not be able to find loan customers
E)a tight money policy is always backed up by fiscal policy

Question 41

Financial firms that underwrite credit default swaps:

A)pay an annual premium to the swap's holder
B)receive an annual premium from the swap's holder
C)are reducing their risk by underwriting these financial instruments
D)potentially receive large payouts if the issuers of securities underlying the swaps default on their obligations to the holders of the securities
E)were not a part of the 2008 financial crisis

Question 42

During and after the 2008 financial crisis,the Bank of Canada engaged in quantitative easing,defined as:

A)purchases of private real assets such as factories and office buildings
B)sales of federal government assets such as crown corporations
C)large-scale purchases of various types of government bonds
D)the tightening of the regulation of Canadian chartered banks
E)the easing of the regulation of Canadian chartered banks

Question 43

Futures and options,which played a part in the 2008 financial crisis,are financial instruments that:

A)are tied to physical commodities but never to other financial instruments
B)involve the current exchange of an item at a set price
C)involve the exchange of some item at a set price at some point in the past
D)allow some financial market participants to avoid risk
E)always add to the financial risk faced by those who trade them

Question 44

In the long run,a recessionary gap means that:

A)unemployment is below its natural rate, causing an increase in wages and moving real output towards its potential level
B)unemployment is above its natural rate, causing an increase in wages and moving real output towards its potential level
C)unemployment is above its natural rate, causing a decrease in wages and moving real output towards its potential level
D)unemployment is below its natural rate, causing a decrease in wages and moving real output towards its potential level
E)unemployment is below its natural rate, causing a decrease in wages and moving real output away from its potential level

Question 45

A leftward shift of the traditional Phillips curve suggests that:

A)the productivity of labour has decreased
B)a lower rate of inflation is now associated with each rate of unemployment than previously
C)cost-push inflation is present
D)a higher rate of inflation is now associated with each rate of unemployment than previously
E)demand-pull inflation is present

Question 46

Rising inflation accompanied by constant or falling employment can be described as:

A)demand-pull inflation
B)Okun's law
C)deflation
D)the Phillips curve
E)stagflation

Question 47

Cost-push inflation may be caused by:

A)a decline in per-unit production costs
B)a decrease in wage rates
C)higher raw material prices
D)an increase in resource availability
E)higher spending

Question 48

Since becoming governor of the Bank of England in 2013,Mark Carney has dealt with problems in London's financial markets,including:

A)a lack of government bonds for the Bank of England to buy and sell
B)Great Britain's decision to stop using the euro as its currency and to go back to using British pounds
C)a rapid rise in global inflation
D)the legal prosecution of several London-based banks charged with engaging in price-fixing
E)ongoing financial failures of large London-based banks