Deck 16: Tools of Monetary Policy

Question 1

The primary indicator of the Bank of Canada's stance on monetary policy is ________.

A) the bank rate
B) the overnight rate
C) the growth rate of the monetary base
D) the growth rate of M2

Answer 1

B

Question 2

The overnight market in Canada is ________ with a ________ range of participants.

A) very liquid; broad
B) very liquid; narrow
C) not very liquid; broad
D) not very liquid; narrow

Answer 2

A

Question 3

Although transactions in the LVTS account for less than ________ of the total number of transactions, they account for about ________ of the value of transactions.

A) 1 percent; 94 percent
B) 5 percent; 90 percent
C) 10 percent; 85 percent
D) 20 percent; 80 percent

Answer 3

A

Question 4

The ACSS is operated by the ________.

A) Canadian Payments Association
B) Bank of Canada
C) Ministry of Finance
D) LVTS

Question 5

The Automated Clearing Settlement System (ACSS) ________.

A) is the core of the Canadian payments system
B) is an electronic net settlement network designed to provide settlement to wholesale transactions
C) is an electronic net settlement network designed to provide settlement to paper-based payment items
D) A and B only.

Question 6

The Automated Clearing Settlement System (ACSS) ________.

A) was introduced on February 4, 1999
B) is an electronic net settlement network designed to provide settlement to wholesale transactions
C) aggregates interbank payments and informs the Bank of Canada of the net amounts to be transferred from and to each participant's settlement account with the Bank of Canada
D) A and B only.

Question 7

The Large Value Transfer System (LVTS) ________.

A) is the core of the Canadian payments system
B) is an electronic net settlement network designed to provide settlement to wholesale transactions
C) is an electronic net settlement network designed to provide settlement to paper-based payment items
D) A and B only.

Question 8

The overnight rate is ________.

A) the interest rate on loans from the Bank of Canada
B) also know as the Bank rate
C) the rate banks give their best customers
D) the interest rate on loans of reserves from one bank to another

Question 9

Large Value Transfer System (LVTS) participants can make a payment only if they ________.

A) have positive settlement balances in their accounts with the Bank of Canada
B) have posted collateral (such as Government of Canada treasury bills and bonds)
C) have explicit lines of credit with other participants
D) All of the above.

Question 10

The Large Value Transfer System (LVTS) ________.

A) was introduced on February 4, 1999
B) is the core of the Canadian payments system
C) is an electronic net settlement network designed to provide settlement to paper-based payments items
D) A and B only.

Question 11

Changes to the operating band are announced by the Bank of Canada ________ times a year.

A) eight
B) six
C) four
D) two

Question 12

The overnight interest rate is also known as the ________.

A) the bank rate
B) the policy rate
C) reference rate
D) the growth rate of M2

Question 13

Where only the net credit or debit position of each participant vis-à-vis all other participants is calculated is known as ________.

A) multilateral netting
B) principal-agent netting
C) moral hazard netting
D) credit risk netting

Question 14

The risk to the entire payments system due to the inability of one financial institution to fulfill its payment obligations in a timely fashion is known as ________.

A) systemic risk
B) the principal-agent problem
C) moral hazard
D) credit risk

Question 15

The target for the overnight interest rate is also known as the ________.

A) the bank rate
B) the policy rate
C) reference rate
D) the growth rate of M2

Question 16

The LVTS was put in place in order to eliminate the ________.

A) systemic risk
B) principal-agent problem
C) moral hazard problem
D) credit risk

Question 17

The overnight rate is important because it is ________.

A) the primary indicator of the Bank of Canada's stance on monetary policy
B) the interest rate paid on federal debt
C) the interest rate charged on government loans
D) A and C only.

Question 18

Multilateral netting is ________.

A) the netting of the credit or debit position of each participant vis-à-vis all other participants
B) an electronic net settlement network designed to provide settlement to paper-based payment items
C) the netting of the forward position of LVTS participants
D) None of the above.

Question 19

The interest rate on loans of reserves from one bank to another is ________.

A) the bank rate
B) the fed funds rate
C) the discount rate
D) the overnight rate

Question 20

45 basis points is equal to ________.

A) 0.45 percent
B) 0.045 percent
C) 4.5 percent
D) 45 percent

Question 21

If the operating band for the overnight interest rate is from 3.5 to 4.0 percent, then ________.

A) the rate on positive settlement balances at the Bank of Canada is 3.5 percent
B) the rate on positive settlement balances at the Bank of Canada is the lower limit of the operating band
C) the bank rate is the lower limit of the operating band
D) A and B only.

Question 22

At the end of each banking day, each LVTS participant must bring its settlement balance with the Bank of Canada ________.

A) close to zero
B) to a positive balance
C) to a negative balance
D) to at least $1 million

Question 23

The overnight interest rate ________.

A) is the shortest-term rate available
B) forms the base of any term structure of interest rates relation
C) is the rate the Bank of Canada charges LVTS participants with negative settlement balances at the end of the banking day
D) A and B only.

Question 24

When the Bank of Canada lowers the operating band for the overnight interest rate, it ________.

A) lowers the bank rate by the same amount
B) encourages LVTS participants to borrow reserves either from each other or from the Bank of Canada
C) it reduces the monetary base and ultimately the money supply
D) A and B only.

Question 25

LVTS participants with positive settlement balances at the end of the day ________.

A) are paid the bank rate
B) are paid the overnight rate
C) are paid the bank rate less 50 basis points
D) are paid the prime rate

Question 26

If LVTS participating financial institutions have insufficient settlement balances ________.

A) they can borrow from each other in the pre-settlement trading period
B) they can borrow from the Bank of Canada
C) they can borrow from the Bank of Canada at the prime rate
D) A and B only.

Question 27

The operating band for the overnight interest rate is ________.

A) 50 basis points wide
B) defines the rate of interest the Bank of Canada charges LVTS participants with negative settlement balances at the end of the banking day
C) defines the rate of interest the Bank of Canada pays LVTS participants with negative settlement balances at the end of the banking day
D) A and B only.

Question 28

If the operating target of the Bank of Canada is 4.5 percent then the bank rate is ________.

A) 4.75 percent
B) 5.25 percent
C) 4.25 percent
D) 4.5 percent

Question 29

If the Bank of Canada pays on deposits to LVTS participants an interest rate of 3.5 percent then the bank rate is ________.

A) 4 percent
B) 3.75 percent
C) 3.25 percent
D) 4.5 percent

Question 30

If the operating band for the overnight interest rate is from 3.5 to 4.0 percent, then ________.

A) the bank rate is 4.0 percent
B) the bank rate is the lower limit of the operating band
C) the bank rate is the rate the Bank of Canada charges LVTS participants with negative settlement balances at the end of the banking day
D) A and C only.

Question 31

If the Bank of Canada pays on deposits to LVTS participants an interest rate of 3.5 percent then the operating target of the Bank's monetary policy is ________ and the bank rate is ________.

A) 3.75 percent; 4 percent
B) 4 percent; 4.25 percent
C) 3.25 percent; 3.5 percent
D) 3 percent; 3.25

Question 32

If the Bank of Canada pays on deposits to LVTS participants an interest rate of 3.5 percent then the operating target of the Bank's monetary policy is ________.

A) 3.75 percent
B) 4 percent
C) 3.25 percent
D) 3 percent

Question 33

The lower limit of the operating band for the overnight interest rate defines ________.

A) the bank rate
B) the prime rate
C) the rate the Bank of Canada pays LVTS participants with positive settlement balances at the end of the banking day
D) the rate the Bank of Canada charges LVTS participants with negative settlement balances at the end of the banking day

Question 34

Standing facilities ________.

A) refers to participant borrowing form each other to bring their settlement balances to zero at the end of the banking day
B) refers to the Bank of Canada refusal to lend to or borrow from a participant to bring their settlement balances to zero at the end of the banking day
C) refers to the Bank of Canada's building in Ottawa
D) refers to the Bank of Canada being ready to lend to or borrow from a participant to bring their settlement balances to zero at the end of the banking day

Question 35

If the operating target of the Bank of Canada is 4 percent then the bank rate is ________.

A) 4.25 percent
B) 4.50 percent
C) 3.5 percent
D) 4 percent

Question 36

The Bank of Canada's operating band is ________ basis points or ________.

A) 50; 0.5 percent
B) 100; 1 percent
C) 50; 5 percent
D) 100; 10 percent

Question 37

The rate spread at the Bank of Canada for LVTS balances is ________.

A) 300 basis points
B) 200 basis points
C) 50 basis points
D) 25 basis points

Question 38

If LVTS participating financial institutions have insufficient settlement balances ________.

A) they can borrow from each other in the pre-settlement trading period at the bank rate
B) they can borrow from each other in the pre-settlement trading period at the overnight rate
C) they can borrow from the Bank of Canada
D) B and C only.

Question 39

The lower limit of the operating band for the overnight interest rate is ________.

A) the bank rate
B) the prime rate
C) the rate the Bank of Canada charges LVTS participants with negative settlement balances at the end of the banking day
D) 50 basis points below the bank rate

Question 40

If the Bank of Canada charges for negative settlement balances to LVTS participants an interest rate of 3.5 percent then the operating target of the Bank's monetary policy is ________.

A) 3.25 percent
B) 3.75 percent
C) 3 percent
D) 4 percent

Question 41

The goal of the Bank of Canada's current monetary policy is to keep the inflation rate within a target range of ________.

A) 2 percent to 3 percent
B) 1 percent to 3 percent
C) 1 percent to 4 percent
D) 2 percent to 4 percent

Question 42

A rise in the overnight rate ________.

A) decreases the opportunity cost of holding desired reserves
B) lowers the opportunity cost of holding desired reserves
C) increases the opportunity cost of holding excess reserves
D) lowers the opportunity cost of holding excess reserves

Question 43

The quantity of reserves demanded rises when the ________.

A) bank rate rises
B) bank rate falls
C) overnight funds rate rises
D) overnight rate falls

Question 44

The Bank of Canada uses the ________ as its operating instrument.

A) nominal interest rate
B) real interest rate
C) open market operations
D) federal funds rate

Question 45

Monetary conditions are impacted by ________.

A) short-term interest rates and the foreign exchange rate
B) open market operations and the prime rate
C) the foreign exchange rate and the inflation rate
D) the Department of Finance

Question 46

Explain why the bank rate minus 50 basis points (i_b-50) is the lower limit for the overnight rate.

Question 47

It is the ________ assumption of ________ that allows for the transmission between nominal and real interest rates.

A) new Keynesian; sticky prices
B) monetarist; sticky prices
C) new Keynesian; perfect markets
D) Bank of Canada; chartered banks allegiance to Canadian monetary policy

Question 48

Explain why the bank rate is an upper limit for the overnight rate.

Question 49

What is the operating band for the overnight interest rate?

Question 50

What is the function of the ACSS?

Question 51

If the Bank of Canada expects the economy to slow down, it ________ the operating band for the overnight interest rate.

A) lowers
B) raises
C) leaves unchanged
D) stabilizes

Question 52

Core CPI excludes ________.

A) volatile components
B) headline items
C) indirect taxes
D) energy costs

Question 53

In the market for reserves, market equilibrium occurs where the ________.

A) quantity of reserves demanded equals the quantity supplied
B) quantity of reserves demanded is above the quantity supplied
C) quantity of reserves demanded is below the quantity supplied
D) quantity of reserves demanded does not equal the quantity supplied

Question 54

What is the service provided by the LVTS? why is it important?

Question 55

In the market for settlement balances, when the overnight interest rate is below the bank rate and above the bank rate less 50 basis points, the supply curve of reserves is ________.

A) vertical
B) horizontal
C) positively sloped
D) negatively sloped

Question 56

In Canada, the market for settlement balances (reserves) is where ________.

A) the federal funds rate is determined
B) the overnight interest rate is determined
C) the discount rate is determined
D) LIBOR is determined

Question 57

When the overnight rate is up to 50 basis points below the bank rate ________.

A) the supply curve of settlement balances has a positive slope
B) the demand curve for settlement balances is vertical
C) the demand curve for settlement balances is horizontal
D) the demand curve for settlement balances has a negative slope

Question 58

The channel/corridor system for setting interest rates ________.

A) is not appropriate for Canadian monetary policy
B) limits the amount banks can borrow from the central bank
C) enables the central bank to set the overnight, policy rate
D) is being phased out as a monetary policy tool

Question 59

The opportunity cost of holding excess reserves is ________.

A) the bank rate
B) the prime rate
C) the treasury bill rate
D) the overnight rate

Question 60

The market equilibrium, in which the quantity of reserves demanded equals the quantity of reserves supplied ________.

A) determines the overnight rate
B) occurs at the intersection of the vertical supply curve and the demand curve at the Bank of Canada's target level of reserves
C) determines the interest rate charged on loans of these reserves
D) All of the above.

Question 61

If the Bank of Canada wants to relieve undesired upward pressure on the overnight interest rate it will enter into a ________.

A) Resale Agreement
B) Sale and Repurchase Agreement
C) Swap
D) Repo

Question 62

The Bank of Canada will engage in a sale and repurchase agreement when it wants to ________ reserves ________ in the banking system.

A) increase; permanently
B) increase; temporarily
C) decrease; temporarily
D) decrease; permanently

Question 63

A reverse repo is a ________.

A) Special Purchase and Resale Agreement
B) Sale and Repurchase Agreement
C) Swap
D) Repo

Question 64

The Bank of Canada's repurchase transactions are an advantage because ________.

A) they occur at the initiative of the Bank of Canada
B) the bank has complete control over the volume
C) they are monopolized by the Bank of Canada
D) A and B only.

Question 65

A repo is a ________.

A) Resale Agreement
B) Purchase and Resale Agreement
C) Swap
D) Repo

Question 66

To keep inflation from falling below the target range, the Bank of Canada ________.

A) decreases the target for the overnight rate which causes the dollar to go down
B) decreases the target for the overnight rate which causes the dollar to go up
C) increases the target for the overnight rate which causes the dollar to go down
D) increases the target for the overnight rate which causes the dollar to go up

Question 67

If the Bank of Canada wants to temporarily inject reserves in the banking system, it will engage in ________.

A) a repurchase agreement
B) a "swap" transaction
C) a reverse repurchase agreement
D) None of the above.

Question 68

SPRAs and SRAs are ________ open market operations.

A) temporary
B) permanent
C) risky
D) conducted 8 times a year

Question 69

Special Purchase and Resale Agreements ________.

A) relieve undesired upward pressure on the overnight interest rate
B) alleviate undesired downward pressure on the overnight financing rate
C) relieve undesired downward pressure on the overnight interest rate
D) alleviate undesired volatility in the overnight financing rate

Question 70

If the Bank of Canada wants to temporarily drain reserves from the banking system, it will engage in ________.

A) a repurchase agreement
B) a sale and repurchase agreement
C) a "pump" agreement
D) None of the above.

Question 71

Sale and Repurchase Agreements ________.

A) relieve undesired upward pressure on the overnight interest rate
B) alleviate undesired downward pressure on the overnight financing rate
C) relieve undesired downward pressure on the overnight interest rate
D) alleviate undesired volatility in the overnight financing rate

Question 72

The Bank of Canada most common operations have been repurchase transactions with ________.

A) stockbrokers
B) primary dealers
C) the public
D) other central banks

Question 73

If the Bank of Canada wants to alleviate undesired downward pressure on the overnight financing rate it will enter into a ________.

A) Purchase and Resale Agreement
B) Repurchase Agreement
C) Swap
D) Reverse Repo

Question 74

The Bank of Canada will engage in a repurchase and resale agreement when it wants to ________ reserves ________ in the banking system.

A) increase; permanently
B) increase; temporarily
C) decrease; temporarily
D) decrease; permanently

Question 75

If the Bank of Canada wants to relieve undesired upward pressure on the overnight interest rate it will enter into a ________.

A) Special Purchase and Resale Agreement
B) Sale and Repurchase Agreement
C) Swap
D) Reverse Repo

Question 76

If the Bank of Canada expects the economy to to be exceeding its capacity, it ________ the operating band for the overnight interest rate.

A) lowers
B) raises
C) leaves unchanged
D) stabilizes

Question 77

The Bank of Canada ________ conducting open market operations in Government of Canada treasury bills and bonds in 1994.

A) started
B) stopped
C) continued
D) implemented

Question 78

If the Bank of Canada wants to temporarily inject reserves in the banking system, it will engage in ________.

A) a repurchase agreement
B) a "swap" transaction
C) a reverse repurchase agreement
D) None of the above.

Question 79

If the Bank of Canada wants to temporarily drain reserves from the banking system, it will engage in ________.

A) a repurchase agreement
B) a sale and repurchase agreement
C) a "pump" agreement
D) None of the above.

Question 80

If the Bank of Canada wants to alleviate undesired downward pressure on the overnight financing rate it will enter into a ________.

A) Special Purchase and Resale Agreement
B) Sale and Repurchase Agreement
C) Swap
D) Repo