Question 1

What is a liquidity crisis?

Accepted Answer

Banks and financial institutions are prone to liquidity problems because they borrow in the short term and use the funds to make long-term investments.Therefore,if a large number of depositors want to withdraw funds,a bank may have trouble meeting demands and face a liquidity crisis.If many depositors try to withdraw their funds at the same time,the result is a bank run that may cause the bank to fail.

Question 2

With its goal of price stability,the Bank of Canada attempts to
A) keep the inflation rate from falling below 5% and rising above 10%.
B) maintain an inflation rate of zero.
C) achieve a low, stable inflation rate.
D) counteract periods of inflation with periods of deflation.

Accepted Answer

The Bank of Canada attempts to achieve a low, stable inflation rate by using monetary policy tools such as adjusting interest rates and managing the money supply. The target inflation rate is currently set at 2%, which is within a range of 1-3%. The goal of price stability is important for promoting economic growth and maintaining the purchasing power of money over time.

Question 3

Although initially a ________ institution,the Bank of Canada is now a ________ corporation.
A) private; public
B) private; Crown
C) Crown; private
D) public; private

Accepted Answer

The Bank of Canada was initially a private institution but became a Crown corporation in 1938, meaning it is owned by the government.

Question 4

The Board of Directors of the Bank of Canada consists of
A) 12 outside directors, the governor, the senior deputy governor, and a deputy minister of finance.
B) the governor, a deputy minister, and several CEOs of large commercial banks.
C) 8 outside directors.
D) CEOs of the largest 5 commercial banks in Canada.

Accepted Answer

The Board of Directors of the Bank of Canada consists of 12 outside directors, the governor, the senior deputy governor, and a deputy minister of finance.

Question 5

________ institutions are banks and other financial institutions whose failure would lead to large disruptions in the economy.
A) Systematically important
B) Commercial
C) Corporate
D) Federal

Accepted Answer

Systematically important institutions (also known as "too big to fail") are those that play a crucial role in the functioning of the economy and whose failure would have far-reaching negative consequences. This typically includes large banks and other financial institutions that are heavily interconnected with other parts of the financial system. Commercial, corporate, and federal institutions may also be systematically important, but this is not always the case.

Question 6

Through open market operations,the Bank of Canada
A) controls the demand for reserves, but not the supply of reserves, in the banking system.
B) controls the supply of reserves and the demand for reserves in the banking system.
C) controls the supply of reserves, but not the demand for reserves, in the banking system.
D) has influence over, but cannot directly control, the supply of reserves and the demand for reserves in the banking system.

Accepted Answer

The Bank of Canada controls the supply of reserves in the banking system through open market operations by buying or selling government securities, but it does not directly control the demand for reserves.

Question 7

Briefly explain the primary goal of the Bank of Canada.

Accepted Answer

The answer of Briefly explain the primary goal of the...

Question 8

The Governing Council consists of
A) the board of directors and CEOs of the largest 5 commercial banks in Canada.
B) the board of directors and the chairman of the prime minister's council of economic advisors.
C) the chairman of the prime minister's council of economic advisors and 4 of the 12 directors who serve on a rotating basis.
D) the governor, senior deputy governor, and the four deputy governors.

Accepted Answer

The Governing Council of the Bank of Canada consists of the governor, senior deputy governor, and the four deputy governors.

Question 9

Why does the Bank of Canada attempt to achieve a low,stable rate of inflation rather than an inflation rate of 0%?

Accepted Answer

The answer of Why does the Bank of Canada attempt...

Question 10

In Canada,the preferred target for the inflation rate is
A) 2%.
B) 0%.
C) 1%.
D) 3%.

Accepted Answer

The Bank of Canada, which is responsible for monetary policy in Canada, has set a target inflation rate of 2%. This target reflects the Bank's belief that low and stable inflation is important for promoting economic growth and maintaining a stable macroeconomic environment. While some argue that a lower inflation target (such as 1%) would be preferable, others argue that a slightly higher target (such as 3%) would be better for promoting economic growth. However, for now, the Bank of Canada appears committed to its current target of 2%.

Question 11

The rate that financial institutions use to lend and borrow from each other at the end of the day is called the
A) discount rate.
B) overnight rate.
C) interbank rate.
D) bank rate.

Accepted Answer

The overnight rate is the interest rate at which financial institutions lend and borrow funds from each other at the end of the day to meet their reserve requirements.

Question 12

The goal of the Bank of Canada is
A) a high foreign-exchange value of the dollar.
B) a high reserve ratio.
C) no inflation.
D) price stability.

Accepted Answer

The goal of the Bank of Canada is to achieve and maintain price stability by targeting a low and stable rate of inflation. This promotes economic growth and stability by keeping the overall level of prices in the economy relatively constant. A high foreign-exchange value of the dollar or a high reserve ratio are not specific goals of the Bank of Canada.

Question 13

The Bank of Canada was created
A) to prevent bad loans by requiring banks to hold reserves.
B) to stimulate the economy in increasing bank reserves.
C) due to a recommendation by a royal commission that was created to analyze the lessons from the Great Depression.
D) to prevent inflation by decreasing the money supply.

Accepted Answer

The Bank of Canada was created in 1934 following a recommendation by the Macmillan Commission, which was created to analyze the lessons from the Great Depression. Its purpose was to regulate and stabilize the Canadian monetary system, and to promote economic and financial welfare. While options A, B, and D are all tools that the Bank of Canada can use to fulfill its purpose, they are not the primary reasons it was created.

Question 14

The most important policy tool used by the Bank of Canada is
A) the target inflation rate.
B) the discount rate.
C) the required reserve rate.
D) the target for the overnight rate.

Accepted Answer

The target for the overnight rate is the most important policy tool used by the Bank of Canada. This rate determines the interest rate at which banks borrow and lend money to each other on an overnight basis, and it has a ripple effect on the economy as a whole, influencing borrowing and lending rates for consumers and businesses. By setting a target for the overnight rate, the Bank of Canada can help to manage inflation and stabilize the economy.

Question 15

The Bank of Canada conducts open market operations with the primary goal of
A) affecting the overnight rate.
B) affecting the discount rate.
C) stabilizing the foreign-exchange market.
D) adjusting reserve requirements.

Accepted Answer

The Bank of Canada conducts open market operations to influence the overnight rate, which is the interest rate at which banks lend funds to each other overnight. By buying or selling government securities, the Bank of Canada can increase or decrease the supply of funds available to banks, which in turn affects the overnight rate. The goal is to maintain a stable and appropriate level of inflation, which is the primary mandate of the Bank of Canada. Discount rates, foreign exchange rates, and reserve requirements are also important tools for the Bank of Canada, but they are not the primary goal of open market operations.

Question 16

By controlling the ________,the Bank of Canada is able to influence ________.
A) overnight rate; market interest rates
B) interbank rate; market interest rates
C) exchange rate; overnight rate
D) exchange rate; market interest rates

Accepted Answer

The Bank of Canada controls the overnight rate, which is the interest rate that commercial banks lend to each other. By setting the overnight rate, the Bank of Canada is able to influence the market interest rates, which are the rates that individuals and businesses pay on loans and mortgages. Therefore, choice A is the best choice. The other choices are not accurate as the interbank rate and exchange rate do not have a direct relationship with market interest rates.

Question 17

In a market economy,uncertain levels of inflation
A) make prices less useful as signals for resource allocation.
B) prompt firms to enter into fewer short-term contracts, and more long-term contracts, with suppliers.
C) balance out income redistribution in the long run.
D) are more beneficial to lenders than to borrowers, as lenders have a tendency to overestimate the expected inflation rate.

Accepted Answer

Uncertain levels of inflation make prices less useful as signals for resource allocation because it becomes difficult for firms and consumers to distinguish between changes in prices due to inflation and changes in prices due to changes in supply and demand. As a result, resource allocation becomes less efficient, leading to potential wastage of resources.

Question 18

Which of the following is not a reason that the central bank does not aim for zero inflation?
A) Measured inflation tends to be higher than actual inflation.
B) The inflation rate would be more likely to be negative.
C) This would limit the ability of the central bank to stimulate the economy
D) Positive inflation "greases the wheels" of the labour market.

Accepted Answer

Measured inflation tends to be higher than actual inflation is not a reason for avoiding zero inflation. The other options are valid reasons: zero inflation could lead to deflation, limit monetary policy effectiveness, and hinder wage adjustments.

Question 19

When and why was the Bank of Canada created?

Accepted Answer

The answer of When and why was the Bank of...

Question 20

Which of the following is not one of the four tasks of the Bank of Canada?
A) Conduct monetary policy.
B) Regulate financial institutions.
C) Issue paper and coin currency.
D) Provide banking services for the federal government.

Accepted Answer

The answer of Which of the following is not one...

Quiz 12: Monetary Policy in the Short Run

What is a liquidity crisis?

With its goal of price stability,the Bank of Canada attempts to

Although initially a institution,the Bank of Canada is now a corporation.

The Board of Directors of the Bank of Canada consists of

________ institutions are banks and other financial institutions whose failure would lead to large disruptions in the economy.

Through open market operations,the Bank of Canada

Briefly explain the primary goal of the Bank of Canada.

The Governing Council consists of

Why does the Bank of Canada attempt to achieve a low,stable rate of inflation rather than an inflation rate of 0%?

In Canada,the preferred target for the inflation rate is

The rate that financial institutions use to lend and borrow from each other at the end of the day is called the

The goal of the Bank of Canada is

The Bank of Canada was created

The most important policy tool used by the Bank of Canada is

The Bank of Canada conducts open market operations with the primary goal of

By controlling the ,the Bank of Canada is able to influence .

In a market economy,uncertain levels of inflation

Which of the following is not a reason that the central bank does not aim for zero inflation?

When and why was the Bank of Canada created?

Which of the following is not one of the four tasks of the Bank of Canada?