Question 1

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 increase the demand for Canadian dollars, leading to an appreciation of the currency. However, this appreciation would harm Canadian exports and reduce aggregate demand, which could cause a recession. To counteract this, the Bank would engage in an expansionary monetary policy, such as decreasing the overnight lending rate, to stimulate borrowing and spending.

Question 2

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

The answer of Consider a central bank that chooses to...

Question 3

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

Accepted Answer

In the short run, the Bank of Canada designs its policies to keep real GDP close to potential output in order to maintain inflation at its targeted level. This is because when there is a gap between actual output and potential output, there can be upward pressure on prices and inflation. By keeping real GDP close to potential output, the Bank of Canada can help prevent this pressure on prices and maintain inflation at its targeted level.

Question 4

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

Accepted Answer

The Bank of Canada aims to reduce any positive or negative output gaps, meaning they strive for the economy to be operating at its potential level of output. This is in an effort to keep inflation close to the official target, which is currently 2%.

Question 5

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 6

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

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

Question 7

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 8

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

If the Canadian dollar depreciates, it will lead to an increase in the price of imported goods and services, which will cause higher inflation. To combat this inflationary pressure, the Bank of Canada should implement an expansionary monetary policy by decreasing its target for the overnight interest rate. This will decrease the cost of borrowing, leading to increased spending and economic growth, which will help to bring the economy back to its potential output level.

Question 9

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, and its current target is to keep the annual inflation rate close to 2%.

Question 10

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

Accepted Answer

A sudden increase in food and energy prices would not immediately affect "core" inflation, which excludes these volatile items, so it might not prompt an immediate policy response.

Question 11

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 in the short run through monetary policy tools such as adjusting the interest rate, while in the long run it aims to influence the path of the price level through its inflation targeting framework.

Question 12

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 could indicate a downturn in economic activity, potentially leading to lower consumer and business confidence, reduced spending, and slower economic growth. In such a scenario, the Bank of Canada might implement an expansionary monetary policy to stimulate the economy, while still aiming to keep inflation within its target range.

Question 13

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 14

It is widely accepted by economists that monetary policy is the most important determinant of a country's

Accepted Answer

Monetary policy has a significant impact on the long-run rate of inflation, as it controls the money supply and interest rates, which affect spending and investment in the economy.

Question 15

As of 2015,the Bank of Canada's policy objective is to maintain inflation at or near the target of

Accepted Answer

The Bank of Canada's policy objective is to maintain inflation at or near the target of 2%, as this is considered the optimal level to promote price stability and sustainable economic growth. Inflation at a higher or lower level can lead to negative economic consequences such as reduced purchasing power or increased uncertainty.

Question 16

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 17

An example of how inflation targeting by the Bank of Canada helps to stabilize the economy is

Accepted Answer

Inflation targeting by the Bank of Canada helps to stabilize the economy by implementing an expansionary monetary policy when there is a recessionary gap which reduces the rate of inflation below the targeted level. This helps to close the gap and stabilize the economy.

Question 18

Inflation targeting

Accepted Answer

Inflation targeting is a stabilizing policy because the Bank of Canada's policy adjustments act to stabilize real GDP growth. By targeting a low and stable rate of inflation, the Bank of Canada can help to provide certainty and stability for economic agents, which can encourage investment and promote long-term growth. While there may be some short-term trade-offs between inflation and output in the short-run, these can be effectively managed through monetary policy adjustments.

Question 19

Inflation that is fully anticipated by workers,firms,and consumers

Accepted Answer

When inflation is fully anticipated, individuals can adjust their expectations accordingly and demand higher wages or prices to account for the expected increase in prices. Therefore, if incomes are fully indexed to inflation, individuals will see their purchasing power maintained despite the inflation. This means that inflation will not impact their standard of living.

Question 20

Most economists now accept the proposition that

Accepted Answer

The answer of Most economists now accept the proposition that
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Quiz 28: Monetary Policy in Canada