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

A contractionary monetary policy involves the central bank raising interest rates, which in turn increases the cost of borrowing for businesses and individuals. This leads to decreased investment spending, as businesses are less likely to invest in capital projects or expansion, and individuals are less likely to take out loans for large purchases such as homes or cars. Decreased investment spending ultimately leads to decreased aggregate demand and a decrease in real GDP.

Question 2

Changes in monetary aggregates such as M2 and M2+ can be a poor guide to the stance of monetary policy if

Accepted Answer

Changes in monetary aggregates can be a poor guide to the stance of monetary policy if money demand is changing in unpredictable ways, as this can make it difficult to interpret the meaning behind the changes in the aggregates. Changes in monetary policy are typically signaled by changes in interest rates or other policy instruments, but if money demand is fluctuating unpredictably, these signals may not be reliable.

Question 3

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, the Bank of Canada can raise its target for the overnight interest rate. This would increase the cost of borrowing, which would discourage firms from investing and ultimately decrease aggregate desired investment. Buying securities in the open market, lowering short-term interest rates, reducing spending, and raising the price level would not directly reduce aggregate desired investment.

Question 4

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

Accepted Answer

An expansionary monetary policy involves increasing the money supply in the economy. One way to do this is by reducing short-term interest rates, which makes borrowing cheaper and encourages spending and investment. As consumers and businesses spend and invest more, the demand for goods and services increases, leading to economic growth and eventually more money flowing into the economy.

Question 5

If desired investment spending is relatively sensitive to changes in interest rates, then monetary policy could be very useful because it would

Accepted Answer

If investment spending is sensitive to changes in interest rates, then monetary policy can be effective in reducing expenditure during inflationary periods by increasing interest rates, which would discourage investment spending. Conversely, it can be effective in expanding expenditure during recessionary periods by decreasing interest rates, which would encourage investment spending.

Question 6

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

Accepted Answer

To remove an inflationary gap, the Bank of Canada would want to slow down the economy and decrease aggregate demand. One way to do this is to increase the target for the overnight interest rate, which would make borrowing money more expensive and reduce consumer and business spending.

Question 7

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 the overnight interest rate target, it is attempting to stimulate economic growth by encouraging borrowing and spending. This typically leads to an increase in the demand for money, meaning that individuals and businesses want to borrow more. In order to accommodate this increased demand, the Bank of Canada will need to increase the supply of money. One way it can do this is by buying government securities on the open market. When the Bank does this, it injects money into the economy which can help to increase lending and spending. This process is known as open market operations and is a common way for central banks to influence the money supply.

Question 8

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

Accepted Answer

The appropriate monetary policy to address a large and persistent recessionary gap would be for the Bank of Canada to reduce its target for the overnight interest rate. This would lower borrowing costs for consumers and businesses, stimulating spending and investment, and ultimately increasing aggregate demand in the economy. Choices A, B, and C would have the opposite effect by raising borrowing costs and reducing lending activity. Choice E, while potentially effective in reducing the money supply and inflation, would not directly address the issue of a recessionary gap.

Question 9

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

Accepted Answer

An expansionary monetary policy involves increasing the money supply and lowering interest rates. Lower interest rates, in turn, make borrowing cheaper, leading to increased investment spending by businesses. This increased investment, combined with increased consumer spending due to the lower interest rates, leads to an increase in real GDP. Therefore, the correct cause-and-effect chain for an expansionary monetary policy is that it will lower the interest rate, raise investment spending, and increase real GDP.

Question 10

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

Accepted Answer

To increase the level of desired aggregate expenditure, the Bank of Canada can use expansionary monetary policy. One way to implement this policy is by reducing the target for the overnight interest rate, which would encourage borrowing and spending by businesses and consumers, thus boosting aggregate expenditure and closing the recessionary gap. A) raising the bank rate would be contractionary and would further decrease aggregate expenditure, B) increasing its spending would be fiscal policy and not monetary policy, C) increasing reserve requirements would be contractionary and would decrease the money supply, and D) selling securities in the open market would also be contractionary and would decrease the money supply.

Question 11

If we observe a small decrease in the actual overnight interest rate over a several-day period, we can definitely conclude that the

Accepted Answer

A small decrease in the actual overnight interest rate could be due to various reasons, such as changes in the supply and demand for funds in the overnight market, international economic events, or changes in bank behaviour. Therefore, we cannot definitively conclude any of the given options without further information.

Question 12

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 would lower borrowing costs for households and firms, leading to an increase in spending and investment, thus stimulating economic activity and expanding the money supply. The other options would either increase the cost of lending or reduce the banks' ability to lend, hence contracting the money supply and slowing down the economy.

Question 13

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

Accepted Answer

A fall in the bank rate indicates that the Bank of Canada has implemented an expansionary monetary policy, which can be used to stimulate economic activity by reducing borrowing costs for firms and households.

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

Increasing the target for the overnight interest rate will lead to an increase in the demand for money, since higher interest rates make borrowing more expensive. To accommodate this change in demand, the Bank of Canada should decrease the supply of money through selling government securities on the open market. This will increase the cost of borrowing in the economy, which will help to slow down inflationary pressures.

Question 15

If we observe a small increase in the actual overnight interest rate over a several-day period, we can definitely conclude that the

Accepted Answer

A small increase in the actual overnight interest rate over a several-day period can be due to various reasons such as changes in market conditions or demand for funds. Therefore, it is not possible to conclude any of the given options without further information or analysis.

Question 16

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

Accepted Answer

Open-market operations refer to the buying and selling of government securities by the central bank in the open market in order to influence the money supply and interest rates, which is a key tool of monetary policy.

Question 17

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

Accepted Answer

The Bank of Canada conducts its open-market operations in response to the changing demand for cash reserves from the commercial banks. This involves buying or selling government securities in order to adjust the level of reserves that banks hold. The goal is to keep the overnight rate close to the target set by the Bank of Canada.

Question 18

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

Accepted Answer

To remove a recessionary gap, the Bank of Canada would want to stimulate economic activity by increasing the supply of money in the economy. One way to do this is by decreasing the target for the overnight interest rate. This would encourage businesses and individuals to borrow more money, as it would be cheaper to do so, and would increase investment and consumer spending.

Question 19

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

Accepted Answer

The answer of The amount of currency in circulation in...

Question 20

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

Accepted Answer

An increase in the bank rate is indicative of a contractionary monetary policy, which is implemented to control inflation by reducing the money supply and increasing the cost of borrowing. Option A, C, D, and E are all incorrect in this context.

Quiz 28: Monetary Policy in Canada