Question 1

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

Accepted Answer

Contractionary monetary policy, which involves reducing the money supply and increasing interest rates, leads to a decrease in investment spending as it becomes more expensive for businesses to borrow money. This decrease in investment spending will lead to a decrease in aggregate demand, which results in a decrease in real GDP. Therefore, the correct answer is B, which states that the policy will raise the interest rate, decrease investment spending, and decrease real GDP.

Question 2

In Canada,open-market operations are

Accepted Answer

Open-market operations in Canada refer to the buying and selling of government securities by the Bank of Canada, with the aim of influencing the supply of money and credit in the economy. This is a common tool used by central banks to implement monetary policy. The other options, such as enforcing reserve requirements or creating competition within the banking industry, are also related to monetary policy but refer to different tools used by the central bank.

Question 3

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

Accepted Answer

Reducing the Bank of Canada's target for the overnight interest rate would make borrowing cheaper and stimulate spending in the economy, increasing the level of desired aggregate expenditure. Raising the bank rate (choice A) and increasing reserve requirements (choice C) would both reduce the supply of money in the economy and potentially worsen the recessionary gap. Increasing the spending of the Bank of Canada (choice B) may not be effective in increasing overall spending in the economy. Selling securities in the open market (choice D) would also reduce the money supply and potentially exacerbate the recession.

Question 4

An expansionary monetary policy by the Bank of Canada could include

Accepted Answer

A reduction of the Bank's target for the overnight interest rate is a common tool used in an expansionary monetary policy. It encourages commercial banks to lend more at lower interest rates, which leads to increased borrowing and spending by consumers and businesses. The other options mentioned are either ineffective or would actually have a contracting effect on the economy.

Question 5

How does the Bank of Canada communicate its target for the overnight interest rate to the public?

Accepted Answer

The Bank of Canada communicates its target for the overnight interest rate to the public through announcements made 8 times per year at pre-specified fixed announcement dates (FADs). This regular and predictable communication helps provide stability and transparency in the economy.

Question 6

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

Accepted Answer

The Bank of Canada primarily uses its overnight interest rate target as its policy instrument to influence aggregate demand in the short run. It may also use other policy instruments, such as open-market operations, to achieve its monetary policy objectives. However, the answer choices that mention using policy variables such as the exchange rate or investment to directly influence the economy are incorrect, as the Bank of Canada does not have direct control over these variables.

Question 7

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

Accepted Answer

By buying government securities on the open market, the Bank of Canada would be increasing the money supply, as the sellers of the securities receive money in exchange. This form of expansionary monetary policy is known as open market operations. Selling government securities on the open market or reducing deposits at commercial banks would have the opposite effect of contracting the money supply. Selling foreign currency assets or changing the price level are also not direct methods of expanding the money supply.

Question 8

The Bank of Canadaʹs purchases and sales of government securities,when they occur,are referred to as

Accepted Answer

The purchase and sale of government securities by the Bank of Canada is known as open-market operations. This refers to the buying and selling of government securities in the open market in order to influence the money supply and interest rates.

Question 9

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

Accepted Answer

When the Bank of Canada lowers its target for the overnight rate, it encourages banks to borrow more money from the central bank at a lower interest rate. This results in an increase in the supply of money as banks have more funds to make loans to their customers. To implement this policy, the Bank of Canada conducts open-market operations by buying government securities (such as bonds) from banks, which increases their reserves and encourages them to lend more money. Thus, choice A is the best answer.

Question 10

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

Accepted Answer

An expansionary monetary policy involves reducing short-term interest rates to encourage borrowing and investment, which increases the money supply over time. Selling foreign-currency reserves and government bonds would have the opposite effect and decrease the money supply. Increasing the target for the overnight interest rate would also increase short-term interest rates, which is contractionary rather than expansionary.

Question 11

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

Accepted Answer

When the Bank of Canada buys or sells government securities, it is conducting open-market operations. This is a common tool used in the implementation of monetary policy, which involves controlling the money supply and interest rates in the economy. The other options listed (commercial lending, changing the target reserve ratio, and setting the target ratio) are also related to monetary policy, but they do not specifically refer to the purchase or sale of government securities.

Question 12

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?

Accepted Answer

The answer of Suppose the Bank of Canada announces its...

Question 13

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?

Accepted Answer

Commercial banks are likely to borrow and lend overnight funds at a rate close to the Bank of Canada's target rate because they can borrow from the Bank of Canada at 3.00% and lend to the Bank at 2.50%, which gives them an incentive to charge rates within that range. Additionally, commercial banks may also face competition from other banks and financial institutions, which can help keep the overnight rate close to the target. None of the other options presented are accurate explanations for why commercial banks would borrow and lend overnight funds at a rate close to the Bank of Canada's target rate.

Question 14

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

Accepted Answer

When the Bank of Canada increases its target for the overnight interest rate, it is essentially trying to decrease aggregate demand to control inflation. This will lead to a decrease in demand for money in the economy. To accommodate this decrease in demand, the Bank of Canada must decrease the supply of money. This can be achieved by selling government securities on the open market, which will decrease the amount of money in circulation. Therefore, the correct answer is D.

Question 15

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

Accepted Answer

The Bank of Canada conducts its open-market operations in response to the changing demand for cash from the commercial banks, making the amount of currency in circulation endogenous to the system. This means it adjusts based on the needs and activities within the economy, rather than being directly controlled or targeted by the central bank.

Question 16

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

Accepted Answer

To decrease the level of aggregate desired investment and close an inflationary gap, the Bank of Canada would need to increase interest rates. The best choice in this scenario would be to raise its target for the overnight interest rate. This would increase the cost of borrowing, reducing investment and slowing down the economy to a more sustainable level. Buying securities in the open market or reducing the Bank of Canada's spending would not directly affect investment levels and may not have the desired effect. Lowering short-term interest rates or raising the price level would be counterproductive, as both would stimulate even more spending and exacerbate the inflationary gap.

Question 17

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

Accepted Answer

The overnight interest rate is a key factor in determining the interest rates on other financial instruments, such as government bonds and mortgages. When the Bank of Canada adjusts the overnight interest rate, it can influence borrowing and spending decisions by consumers, businesses, and government, which can impact the broader economy. Therefore, changes in the overnight interest rate can lead to changes in longer-term interest rates.

Question 18

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,

Accepted Answer

When the Bank of Canada raises its target for the overnight interest rate, it becomes more expensive for commercial banks to borrow money from the central bank. This leads to a decrease in the demand for loans from commercial banks, as they pass on these higher borrowing costs to their customers. As a result, commercial banks buy government securities from the Bank of Canada in order to maintain their liquidity position, which leads to a decrease in the money supply. Thus, option D is the correct choice.

Question 19

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

Accepted Answer

When the Bank of Canada reduces its target for the overnight interest rate, it is trying to encourage borrowing and spending to stimulate economic growth. This will increase the demand for money, and the Bank will need to accommodate this increased demand by increasing the supply of money. The most common way for the Bank to do this is by buying government securities on the open market, which injects new money into the economy and increases the money supply. This can help to lower interest rates further, which can stimulate even more borrowing and spending. Therefore, choice A is the best answer.

Question 20

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

Accepted Answer

The Bank of Canada conducts its open-market operations directly in response to the changing demand for cash reserves from the commercial banks. This allows the Bank of Canada to influence interest rates and the money supply in the economy.

Quiz 28: Monetary Policy in Canada