Question 1

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

Accepted Answer

The Bank of Canada's policies are designed to keep real GDP close to potential output which helps maintain a stable inflation rate in the short run. Eliminating all unemployment or negative shocks to the economy may not be feasible or effective in achieving this goal. Minimizing the growth of the money supply may be a part of the policy, but it is not the sole focus. Allowing the aggregate supply curve to close any output gaps may also be a part of the policy, but it is not the primary objective.

Question 2

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 a contractionary monetary policy if the Bank's policy experts traced the cause of the appreciation to

Accepted Answer

The answer of Suppose Canadian real GDP is equal to...

Question 3

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

Accepted Answer

A major decline in the Canadian stock market index could lead to reduced wealth and potentially lower spending by consumers and businesses, which might slow down the economy. In such a scenario, the Bank of Canada might implement an expansionary monetary policy to stimulate economic activity, while still aiming to keep inflation within its target range.

Question 4

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

Accepted Answer

An increase in the desire of non-residents to purchase Canadian financial assets would result in an increase in the demand for Canadian dollars, which would appreciate the currency. This appreciation would make Canadian exports more expensive and thus decrease the demand for Canadian goods and services, potentially leading to a decrease in real GDP below potential. To counteract this, the Bank might engage in expansionary monetary policy, such as decreasing the overnight lending rate, to stimulate economic growth and maintain real GDP at potential.

Question 5

Suppose we have inflation that is fully anticipated by workers,firms,and consumers.In this case,the inflation

Accepted Answer

When inflation is fully anticipated, workers, firms, and consumers can adjust their expectations and behavior accordingly. If a person's income is fully indexed to inflation, their purchasing power will not be impacted by the inflation as their income will increase at the same rate as the inflation. Thus, their real income will remain constant. This is the case with choice D.

Question 6

Which of the following provides the best example of how inflation targeting by the Bank of Canada helps to stabilize the economy?

Accepted Answer

Inflation targeting helps stabilize the economy by allowing the central bank to adjust monetary policy in response to changes in the economy. When there is a recessionary gap, the Bank of Canada can use expansionary monetary policy (such as lowering interest rates) to close the gap and increase inflation back to the target level. This helps to stabilize the economy by addressing the gap and maintaining the target level of inflation. Option A is partially true, but does not address the role of the Bank of Canada in stabilizing the economy. Option C is inaccurate, as commercial banks do not automatically increase deposit creation in response to low inflation. Option D is incorrect, as the inflation target is not adjusted to close output gaps. Option E is also incorrect, as the appropriate inflation target is chosen based on economic conditions, not specifically to close output gaps.

Question 7

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

Accepted Answer

A significant and sustained appreciation of the Canadian dollar on the foreign-exchange market will make Canadian exports more expensive and imports cheaper, leading to a decrease in net exports and a decrease in aggregate demand. To counter this, the Bank of Canada should engage in expansionary monetary policy to increase aggregate demand and bring the economy back to potential GDP.

Question 8

Most economists now accept the proposition that

Accepted Answer

To reduce the long-run rate of inflation, a sustained monetary contraction is necessary, as it helps to decrease the money supply growth, thereby reducing inflationary pressures.

Question 9

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

Accepted Answer

An appreciation of the Canadian dollar can be caused by various factors, not just excess demand for Canadian products. Depending on the cause, the Bank of Canada might need to either tighten or loosen monetary policy to maintain economic stability.

Question 10

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

Accepted Answer

A depreciation of the Canadian dollar would make Canadian goods cheaper to foreigners, likely increasing exports and potentially leading to higher demand and inflation in Canada. To combat this inflation and stick to its inflation target, the Bank of Canada would likely implement a contractionary monetary policy, which involves increasing its target for the overnight interest rate to cool down the economy.

Question 11

Which of the following statements about inflation targeting is correct? Inflation targeting

Accepted Answer

Inflation targeting is a stabilizing policy as it requires the Bank of Canada to adjust its policies to stabilize the inflation rate, which in turn can lead to stabilization of real GDP growth. Option A is incorrect because inflation targeting is based on short to medium-term goals and does not assume the long-run neutrality of money. Option B is incorrect because inflation targeting policies are based on a systematic and rule-based framework, which helps to avoid inappropriate policy responses. Option D is incorrect because fiscal policy targeting is subject to political factors and can be less reliable than inflation targeting. Option E is incorrect because inflation targeting aims to minimize output gaps, not create them.

Question 12

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

Accepted Answer

Monetary policy impacts the economy with a lag; it typically affects real GDP in the short to medium term (9-12 months) and has a more delayed effect on core inflation (18-24 months).

Question 13

Consider a central bank that chooses to implement its monetary policy by expanding the money supply by a fixed percentage amount in every year.One important disadvantage with this approach to monetary policy is that it may

Accepted Answer

If the demand for money is unstable, a fixed expansion of the money supply could lead to economic instability, as the supply may not match the fluctuating demand, causing inflation or deflation.

Question 14

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

Accepted Answer

An increase in food and energy prices often affects headline inflation but may not immediately impact core inflation, which excludes volatile items like food and energy. Central banks, focusing on core inflation for policy decisions, might delay their response until they see broader inflationary pressures.

Question 15

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

Accepted Answer

In the short run, the Bank of Canada aims to reduce any positive or negative output gaps (i.e. the difference between actual and potential output), in an effort to keep inflation close to the official target. This is because output gaps can have an effect on inflation. If actual output is below potential output, there will be less demand for goods and services and lower inflationary pressures, while an overheated economy can lead to inflation spiraling out of control. Therefore, the Bank of Canada aims to manage the output gap to maintain price stability.

Question 16

Time lags in the conduct of monetary policy can cause

Accepted Answer

Time lags in the conduct of monetary policy can make it difficult to time appropriate policy actions and can even lead to destabilization. For example, a contractionary policy implemented to control inflation may not have an immediate effect and may instead lead to a slowdown or recession in the economy, making it important to carefully consider the timing of such policies.

Question 17

The Bank of Canada's formal policy target is ________.It's current target is to keep the annual inflation rate close to ________%.

Accepted Answer

The Bank of Canada's formal policy target is CPI inflation, which stands for Consumer Price Index inflation. Its current target is to keep the annual inflation rate close to 2%. Core inflation is a measure that excludes volatile components such as food and energy prices, but it is not the Bank of Canada's formal policy target. The money supply is not a formal policy target for the Bank of Canada, but it can be an important variable in the transmission mechanism of monetary policy.

Question 18

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

Accepted Answer

The Bank of Canada tries to influence real GDP and the path of the price level in the short run through monetary policy. In the long run, the Bank of Canada aims to maintain an inflation target of 2%, which also affects the path of the price level. The distribution of income, economic efficiency, and the exchange rate are not primary economic variables that the Bank tries to influence through its monetary policy.

Question 19

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

Accepted Answer

The answer of Which of the following goods are included...

Question 20

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

Accepted Answer

When the Canadian dollar depreciates, it makes Canadian goods cheaper for foreign buyers, potentially increasing exports. However, if the depreciation is due to reduced demand for Canadian-made raw materials, it could signal a decrease in economic activity. To combat potential negative effects on the economy and to ensure inflation remains on target, the Bank of Canada might lower the overnight interest rate. This expansionary monetary policy can stimulate economic activity by making borrowing cheaper, encouraging spending and investment.

Quiz 28: Monetary Policy in Canada