Question 1

From an initial long-run macroeconomic equilibrium, if the Bank of Canada anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply, then the Bank of Canada would most likely
A)decrease interest rates.
B)increase interest rates.
C)decrease income tax rates.
D)increase income tax rates.
E)leave interest rates unchanged.

Accepted Answer

When the Bank of Canada anticipates that aggregate demand will grow significantly slower than long-run aggregate supply, it would likely decrease interest rates to stimulate borrowing and spending, thereby increasing aggregate demand to match the growth in long-run aggregate supply.

Question 2

Figure 11.9  Alt text for Figure 11.9: In figure 11.9, a static AD-AS model.
Long description for Figure 11.9: The x-axis is labelled, real GDP (trillions of 2007 dollars)and the y-axis is labelled, price level (CPI).5 lines are shown; AD1, AD2, AD3, LRAS, SRAS.Line AD1 begins in the top left corner and slopes down to the end of the x-axis.Line AD2 follows the same slope but is plotted to the left.Similarly, line AD3 is plotted to the left of line AD2.Line SRAS begins close to the vertex and slopes up to the top right corner.Line LRAS is perpendicular to the x-axis, and passes through points D, B, and E.Lines AD3 and SRAS intersect at point A.Lines AD2, LRAS, and SRAS intersect at point B.Lines AD1 and SRAS intersect at point C.Lines AD1 and LRAS intersect at point D.Lines AD3 and LRAS intersect at point E.
-Refer to Figure 11.9.Suppose the Bank of Canada sells government of Canada bonds in pursuit of contractionary monetary policy.Using the static AD-AS model in the figure above, this situation would be depicted as a movement from
A)A to B.
B)B to D.
C)C to B.
D)B to C.
E)C to D.

Accepted Answer

The answer of Figure 11.9  Alt text for Figure...

Question 3

By May 2009, bank reserves in the U.S.had soared to more than US$900 billion.Which of the following is not a reason partially explaining why banks were piling up excess reserves rather than lending funds out?
A)the U.S.Federal Reserve's decision to start paying interest of 0.25 percent on bank reserves held as deposits held at the Federal Reserve
B)the reduced demand for loans of households and firms who already faced damaged financial positions due to the recession
C)the reluctance of banks to make loans at low interest rates to households and firms with financial positions damaged by the recession
D)liquidity traps leaving the central bank unable to lower short-term interest rates further to spur on lending
E)the inability of the Federal Reserve to target a federal funds rate of -5 percent

Accepted Answer

The answer of By May 2009, bank reserves in the...

Question 4

Figure 11.9  Alt text for Figure 11.9: In figure 11.9, a static AD-AS model.
Long description for Figure 11.9: The x-axis is labelled, real GDP (trillions of 2007 dollars)and the y-axis is labelled, price level (CPI).5 lines are shown; AD1, AD2, AD3, LRAS, SRAS.Line AD1 begins in the top left corner and slopes down to the end of the x-axis.Line AD2 follows the same slope but is plotted to the left.Similarly, line AD3 is plotted to the left of line AD2.Line SRAS begins close to the vertex and slopes up to the top right corner.Line LRAS is perpendicular to the x-axis, and passes through points D, B, and E.Lines AD3 and SRAS intersect at point A.Lines AD2, LRAS, and SRAS intersect at point B.Lines AD1 and SRAS intersect at point C.Lines AD1 and LRAS intersect at point D.Lines AD3 and LRAS intersect at point E.
-Refer to Figure 11.9.Suppose the Bank of Canada lowers its target for the overnight interest rate.Using the static AD-AS model in the figure above, this situation would be depicted as a movement from
A)A to B.
B)B to A.
C)C to B.
D)E to A.
E)C to D.

Accepted Answer

The answer of Figure 11.9  Alt text for Figure...

Question 5

In response to already low interest rates doing little to stimulate the economy, the U.S.Federal Reserve began buying 10-year Treasury notes and certain mortgage-backed securities to keep interest rates low.This policy is known as
A)inflation targeting.
B)contractionary monetary policy.
C)securities-bubble deflating.
D)quantitative easing.
E)discretionary monetary policy.

Accepted Answer

Quantitative easing is a monetary policy that involves the central bank buying a large amount of government bonds or other financial assets to inject money into the economy and stimulate growth. The goal is to lower interest rates and increase the supply of credit to boost lending and investment. This policy is often used when interest rates are already very low, and traditional monetary policy tools are no longer effective.

Question 6

Describe how the Bank of Canada uses open market operations to change short-term and long-term interest rates.

Accepted Answer

The answer of Describe how the Bank of Canada uses...

Question 7

A decrease in interest rates can ________ the demand for stocks as stocks become relatively ________ attractive investments as compared to bonds.
A)increase; more
B)decrease; less
C)decrease; more
D)increase; less
E)increase; similar

Accepted Answer

A decrease in interest rates makes bonds less attractive as investments because they offer lower yields. In comparison, stocks, which represent ownership in companies and potential for capital appreciation, become relatively more attractive. Therefore, a decrease in interest rates can increase the demand for stocks.

Question 8

Give an example of a monetary policy target.Explain why the Bank of Canada uses policy targets.

Accepted Answer

The answer of Give an example of a monetary policy...

Question 9

The situation in which short-term interest rates are pushed to zero, leaving the central bank unable to lower them further is known as
A)the Taylor rule.
B)a liquidity trap.
C)a zero-sum game.
D)an interest rate panic.
E)an inverted yield curve.

Accepted Answer

A liquidity trap is a situation where monetary policy becomes ineffective, as the central bank is unable to stimulate economic growth through lowering short-term interest rates, due to the low or zero levels of interest rates already in effect. This occurs when individuals and businesses are hoarding cash, and are unwilling or unable to spend or invest, even when borrowing costs are low. This results in a stagnant economy, with little growth and no inflation, despite the best efforts of the central bank.

Question 10

An increase in interest rates
A)decreases investment spending on machinery, equipment and factories, but increases consumption spending on durable goods and net exports.
B)decreases investment spending on machinery, equipment and factories, and consumption spending on durable goods, but increases net exports.
C)decreases investment spending on machinery, equipment and factories, consumption spending on durable goods, and net exports.
D)increases investment spending on machinery, equipment and factories, consumption spending on durable goods, and net exports.
E)decreases investment spending on machinery, equipment and factories, but increase net exports and consumption spending.

Accepted Answer

An increase in interest rates tends to increase the cost of borrowing, making it more expensive for businesses to finance investments in machinery, equipment and factories. This decrease in investment spending tends to result in a reduction in consumption spending on durable goods and a decrease in net exports as a result of higher borrowing costs for consumers and businesses. Therefore, the best choice is C - a decrease in investment spending on machinery, equipment and factories, consumption spending on durable goods, and net exports.

Question 11

An increase in the interest rate should ________ the demand for dollars and the value of the dollar, and net exports should ________.
A)decrease; decrease
B)decrease; increase
C)increase; decrease
D)increase; increase
E)increase; not change

Accepted Answer

An increase in the interest rate makes holding dollars more attractive, leading to an increase in demand for dollars and an appreciation in the value of the dollar. With a stronger dollar, exports become more expensive and imports become cheaper, causing net exports to decrease.

Question 12

The ability of the Bank of Canada to use monetary policy to affect economic variables such as real GDP ultimately depends upon its ability to affect
A)tax rates.
B)real interest rates.
C)nominal interest rates.
D)foreign exchange rates.
E)commercial bank reserves.

Accepted Answer

The Bank of Canada can directly control the overnight interest rate, which affects real interest rates in the economy as it influences the cost of borrowing for businesses and consumers. By raising or lowering interest rates, the central bank can influence the level of investment and consumption in the economy, which in turn can impact real GDP. Other variables listed, such as tax rates, foreign exchange rates, and commercial bank reserves, may indirectly affect the economy, but they are not directly controlled by the Bank of Canada through its monetary policy tools. Nominal interest rates are also influenced by the central bank's policies, but they do not reflect changes in inflation, which is crucial for determining the real cost of borrowing.

Question 13

Figure 11.9  Alt text for Figure 11.9: In figure 11.9, a static AD-AS model.
Long description for Figure 11.9: The x-axis is labelled, real GDP (trillions of 2007 dollars)and the y-axis is labelled, price level (CPI).5 lines are shown; AD1, AD2, AD3, LRAS, SRAS.Line AD1 begins in the top left corner and slopes down to the end of the x-axis.Line AD2 follows the same slope but is plotted to the left.Similarly, line AD3 is plotted to the left of line AD2.Line SRAS begins close to the vertex and slopes up to the top right corner.Line LRAS is perpendicular to the x-axis, and passes through points D, B, and E.Lines AD3 and SRAS intersect at point A.Lines AD2, LRAS, and SRAS intersect at point B.Lines AD1 and SRAS intersect at point C.Lines AD1 and LRAS intersect at point D.Lines AD3 and LRAS intersect at point E.
-Refer to Figure 11.9.Suppose the economy is in a recession and the Bank of Canada pursues an expansionary monetary policy.Using the static AD-AS model in the figure above, this would be depicted as a movement from
A)A to B.
B)B to C.
C)C to B.
D)A to E.
E)C to D.

Accepted Answer

An expansionary monetary policy would shift the AD curve to the right, from A to B.

Question 14

Expansionary monetary policy refers to the ________ to increase real GDP.
A)government's increasing spending and lowering taxes
B)government's decreasing spending and raising taxes
C)Bank of Canada's increasing the money supply and decreasing interest rates
D)Bank of Canada's decreasing the money supply and increasing interest rates
E)private firms decisions concerning the payment of dividends

Accepted Answer

Expansionary monetary policy refers to the Bank of Canada's action to increase the money supply and lower interest rates to encourage borrowing and spending, thus stimulating economic activity and increasing real GDP. Option A refers to expansionary fiscal policy, which involves the government's increasing spending and lowering taxes to achieve the same goal, and Option B refers to contractionary fiscal policy, which would have the opposite effect. Option D describes a contractionary monetary policy, which would reduce economic growth. Option E is unrelated to monetary policy.

Question 15

Figure 11.9  Alt text for Figure 11.9: In figure 11.9, a static AD-AS model.
Long description for Figure 11.9: The x-axis is labelled, real GDP (trillions of 2007 dollars)and the y-axis is labelled, price level (CPI).5 lines are shown; AD1, AD2, AD3, LRAS, SRAS.Line AD1 begins in the top left corner and slopes down to the end of the x-axis.Line AD2 follows the same slope but is plotted to the left.Similarly, line AD3 is plotted to the left of line AD2.Line SRAS begins close to the vertex and slopes up to the top right corner.Line LRAS is perpendicular to the x-axis, and passes through points D, B, and E.Lines AD3 and SRAS intersect at point A.Lines AD2, LRAS, and SRAS intersect at point B.Lines AD1 and SRAS intersect at point C.Lines AD1 and LRAS intersect at point D.Lines AD3 and LRAS intersect at point E.
-Refer to Figure 11.9.Suppose the economy is in short-run equilibrium above potential GDP, the unemployment rate is very low, and wages and prices are rising.Using the static AD-AS model in the figure above, the correct Bank of Canada policy for this situation would be depicted as a movement from
A)A to B.
B)B to C.
C)C to B.
D)A to E.
E)C to D.

Accepted Answer

EC) Moving from C to B represents a contractionary monetary policy, which is appropriate when the economy is overheating (above potential GDP with low unemployment and rising wages and prices). This policy aims to reduce inflationary pressures by decreasing aggregate demand.E) Moving from C to D also indicates a contractionary policy, aiming to decrease aggregate demand to tackle inflation, similar to the move from C to B. Both moves are suitable for cooling down an overheated economy.

Question 16

Figure 11.9  Alt text for Figure 11.9: In figure 11.9, a static AD-AS model.
Long description for Figure 11.9: The x-axis is labelled, real GDP (trillions of 2007 dollars)and the y-axis is labelled, price level (CPI).5 lines are shown; AD1, AD2, AD3, LRAS, SRAS.Line AD1 begins in the top left corner and slopes down to the end of the x-axis.Line AD2 follows the same slope but is plotted to the left.Similarly, line AD3 is plotted to the left of line AD2.Line SRAS begins close to the vertex and slopes up to the top right corner.Line LRAS is perpendicular to the x-axis, and passes through points D, B, and E.Lines AD3 and SRAS intersect at point A.Lines AD2, LRAS, and SRAS intersect at point B.Lines AD1 and SRAS intersect at point C.Lines AD1 and LRAS intersect at point D.Lines AD3 and LRAS intersect at point E.
-Refer to Figure 11.9.Suppose the economy is in a recession and no policy is pursued.Using the static AD-AS model in the figure above, this situation would be depicted as a movement from
A)A to B.
B)B to A.
C)C to B.
D)A to E.
E)C to D.

Accepted Answer

The answer of Figure 11.9  Alt text for Figure...

Question 17

Rising nominal GDP will increase the demand for money and short-term interest rates.

Accepted Answer

Rising nominal GDP means that the economy is growing, which will increase the demand for money as people and businesses need more funds to invest and consume. As the demand for money increases, short-term interest rates will also rise to ensure that supply meets demand, making it more expensive to borrow money in the short-term.

Question 18

Buying a house during a recession may be a good idea if your job seems secure because the Bank of Canada often lowers interest rates during a recession.

Accepted Answer

During a recession, the Bank of Canada often lowers interest rates to stimulate economic growth. This can make it more affordable to buy a house, as the cost of borrowing money is reduced. However, it is important to ensure that your job is secure before taking on such a large financial commitment, as job losses are also common during a recession.

Question 19

Use the money demand and money supply model to show graphically and explain the effect on interest rates of the Bank of Canada's open market purchase of government securities.

Accepted Answer

The answer of Use the money demand and money supply...

Question 20

Figure 11.8  Alt text for Figure 11.8: In figure 11.8, a graph comparing real GDP and price level.
Long description for Figure 11.8: The x-axis is labelled, real GDP (trillions of 2000 dollars), and the y-axis is labelled, price level (GDP deflator, 2000 = 100).3 lines are shown; AD, LRAS, SRAS.Line AD begins in the top left corner and slopes down to the bottom center.Line SRAS begins in the bottom left corner and slopes up to the top right corner.Line LRAS is perpendicular to the x-axis, and intersects the lines AD and SRAS.The point of intersection of the lines AD and SRAS is marked as A.
-Refer to Figure 11.8.In the figure above, if the economy is at point A, the appropriate monetary policy by the Bank of Canada would be to
A)lower interest rates.
B)raise interest rates.
C)lower income taxes.
D)raise income taxes.
E)increase spending.

Accepted Answer

If the economy is at point A, it is below its potential output, indicating a recessionary gap. The appropriate monetary policy in this situation would be to lower interest rates to stimulate borrowing and investment, thereby increasing aggregate demand and pushing the economy towards its potential output.

Quiz 11: Monetary Policy

From an initial long-run macroeconomic equilibrium, if the Bank of Canada anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply, then the Bank of Canada would most likely

By May 2009, bank reserves in the U.S.had soared to more than US$900 billion.Which of the following is not a reason partially explaining why banks were piling up excess reserves rather than lending funds out?

In response to already low interest rates doing little to stimulate the economy, the U.S.Federal Reserve began buying 10-year Treasury notes and certain mortgage-backed securities to keep interest rates low.This policy is known as

Describe how the Bank of Canada uses open market operations to change short-term and long-term interest rates.

A decrease in interest rates can the demand for stocks as stocks become relatively attractive investments as compared to bonds.

Give an example of a monetary policy target.Explain why the Bank of Canada uses policy targets.

The situation in which short-term interest rates are pushed to zero, leaving the central bank unable to lower them further is known as

An increase in interest rates

An increase in the interest rate should the demand for dollars and the value of the dollar, and net exports should .

The ability of the Bank of Canada to use monetary policy to affect economic variables such as real GDP ultimately depends upon its ability to affect

Expansionary monetary policy refers to the ________ to increase real GDP.

Rising nominal GDP will increase the demand for money and short-term interest rates.

Buying a house during a recession may be a good idea if your job seems secure because the Bank of Canada often lowers interest rates during a recession.

Use the money demand and money supply model to show graphically and explain the effect on interest rates of the Bank of Canada's open market purchase of government securities.