Question 1

Assume that the Bank of Canada's policy is to keep the price level from either rising or falling.If aggregate supply decreases in the economy,the Bank of Canada:
A)will have to decrease interest rates if it wishes to keep the price level from falling
B)will have to increase the money supply if it wishes to keep the price level from falling
C)will have to decrease the money supply if it wishes to keep the price level from rising
D)can keep the price level stable without altering the money supply or interest rate
E)will have to increase the money supply if it wishes to keep the price level from rising

Accepted Answer

C

Question 2

-When the Bank of Canada engages in an easy money policy,the interest rate received on bonds tends to:
A)fall
B)rise
C)remain constant
D)move in the same direction as the bonds' price
E)move in a random fashion

Accepted Answer

When the Bank of Canada (or any central bank) engages in an easy money policy, it typically lowers interest rates to stimulate the economy. Lower interest rates make new bonds less attractive because they pay out less interest, causing the interest rate received on existing bonds to fall as their prices adjust inversely.

Question 3

-An increase in the money supply will tend to:
A)lower the interest rate and lower equilibrium real output
B)lower the interest rate and increase equilibrium real output
C)increase the interest rate and increase equilibrium real output
D)increase the interest rate and lower equilibrium real output
E)keep the interest rate and equilibrium real output the same

Accepted Answer

An increase in the money supply typically lowers interest rates, making borrowing cheaper. This encourages investment and spending, which can lead to an increase in equilibrium real output.

Question 4

If the Bank of Canada wants to reduce bank lending,it typically:
A)sells bonds in the open market
B)buys bonds in the open market
C)lowers the target overnight rate
D)issues a directive demanding that banks call in loans
E)issues a press release asking banks to call in loans

Accepted Answer

When the Bank of Canada wants to reduce bank lending, it sells bonds in the open market. This action removes liquidity from the financial system, making it more expensive for banks to borrow money. As a result, banks are likely to reduce the amount of lending they do.

Question 5

In terms of the aggregate demand and aggregate supply model,an expansionary monetary policy is designed to shift the aggregate:
A)demand curve rightward
B)demand curve leftward
C)supply curve rightward
D)supply curve leftward
E)demand and aggregate supply curves leftward

Accepted Answer

An expansionary monetary policy is aimed at increasing the money supply and lowering interest rates, which would stimulate consumer and business spending. This would shift the aggregate demand curve rightward, as there would be a higher level of spending at each price level.

Question 6

The bank rate is the interest rate at which:
A)chartered banks lend to large corporations
B)the Bank of Canada lends to large corporations
C)near banks lend to home builders
D)the Bank of Canada lends to CPA members
E)chartered banks lend to ordinary customers

Accepted Answer

The answer of The bank rate is the interest rate...

Question 7

Monetary policies that cause an increase in the money supply:
A)raise the interest rate, decrease spending on investment and consumer durables, and shift aggregate demand leftward
B)lower the interest rate, decrease spending on investment and consumer durables, and shift aggregate demand rightward
C)lower the interest rate, increase spending on investment and consumer durables, and shift aggregate demand leftward
D)raise the interest rate, increase spending on investment and consumer durables, and shift aggregate demand rightward
E)lower the interest rate, increase spending on investment and consumer durables, and shift aggregate demand rightward

Accepted Answer

When the monetary policies increase the money supply, the interest rate is lowered, which makes it cheaper to borrow and leads to an increase in spending on investment and consumer durables. As a result, aggregate demand is shifted rightward, which can lead to an increase in economic activity and inflation. Therefore, the best choice is E.

Question 8

If the demand for money increases and the monetary authorities want interest rates to remain unchanged,which of the following would be the most appropriate policy?
A)recall currency from circulation
B)reduce tax rates
C)buy bonds in the open market
D)raise the target overnight rate
E)sell bonds in the open market

Accepted Answer

If demand for money increases and the monetary authorities want interest rates to remain unchanged, buying bonds in the open market is the appropriate policy. This will increase the money supply, which will help to meet the increased demand for money without raising interest rates.

Question 9

-If the economy's potential output is $550 billion,the monetary authorities should seek to:
A)establish the money supply at $50 billion
B)establish the money supply at $80 billion
C)shift the aggregate supply curve to the left
D)establish the equilibrium interest rate at 3 percent
E)shift the aggregate supply curve to the right

Accepted Answer

The answer of 
-If the economy's potential output is $550...

Question 10

The money supply (M),the interest rate (r),and aggregate demand (AD)are related such that a(n):
A)reduction in M reduces r and the reduction in r increases AD
B)reduction in M increases r and the increase in r decreases AD
C)increase in M increases r and the increase in r decreases AD
D)increase in M reduces r and the reduction in r decreases AD
E)increase in M increases r and the increase in r increases AD

Accepted Answer

A reduction in the money supply (M) typically leads to an increase in interest rates (r) because there is less money available for borrowing. Higher interest rates make borrowing more expensive, which can reduce spending and investment, thereby decreasing aggregate demand (AD).

Question 11

-When the Bank of Canada engages in a tight money policy,the price of bonds tends to:
A)fall
B)rise
C)remain constant
D)move in the same direction as the bonds' interest rate
E)move in a random fashion

Accepted Answer

When the Bank of Canada (or any central bank) engages in a tight money policy, it typically increases interest rates to reduce inflation and slow down economic growth. Higher interest rates make new bonds more attractive because they offer higher yields. Consequently, the price of existing bonds, which have lower interest rates compared to the new bonds issued in the higher interest rate environment, tends to fall. This is because investors prefer to buy new bonds that offer higher returns, reducing the demand for existing bonds with lower yields.

Question 12

Which of the following statements best describes the cause-and-effect chain of an expansionary monetary policy?
A)A decrease in the money supply will lower the interest rate, increase aggregate demand, and increase real output.
B)A decrease in the money supply will raise the interest rate, decrease aggregate demand, and decrease real output.
C)An increase in the money supply will raise the interest rate, decrease aggregate demand, and decrease real output.
D)An increase in the money supply will lower the interest rate, decrease aggregate demand, and increase real output.
E)An increase in the money supply will lower the interest rate, increase aggregate demand, and increase real output.

Accepted Answer

An expansionary monetary policy involves an increase in the money supply, which is usually done by the central bank. This increase in the money supply leads to a decrease in interest rates because there is more money available for lending. This, in turn, leads to an increase in borrowing and spending by businesses and consumers, which increases aggregate demand. The increase in aggregate demand leads to an increase in real output and employment, as businesses hire more workers and increase production to meet the increased demand.

Question 13

The monetary authorities signal changes in monetary policy by:
A)selling bonds in the open market
B)buying bonds in the open market
C)changing the 50-basis-point range for the overnight rate
D)issuing a press release
E)informing the government of their decision

Accepted Answer

Monetary authorities often signal changes in monetary policy by adjusting the target range for the overnight interest rate, which is a key tool for influencing economic activity.

Question 14

The interest rate at which the Bank of Canada lends to CPA members is called:
A)the prime rate
B)the short-term rate
C)the long-term rate
D)the government bond rate
E)the bank rate

Accepted Answer

The interest rate at which the Bank of Canada lends to CPA members is called the bank rate. This is the rate used by the Bank of Canada to influence economic activity and control inflation. The bank rate can affect various borrowing rates, including the prime rate and short-term and long-term rates.

Question 15

-If the economy's potential output is $550 billion and the equilibrium interest rate is 7 percent:
A)there is an inflationary gap of $50 billion
B)the monetary authorities should increase the money supply from $50 billion to $110 billion
C)the economy is operating at its potential output
D)there is a recessionary gap of $200 billion
E)there is an inflationary gap of $200 billion

Accepted Answer

The answer of 
-If the economy's potential output is $550...

Question 16

Which of the following is not a tool of monetary policy?
A)an increase in the target overnight rate
B)an open market purchase of bonds
C)changes in tax rates
D)an open market sale of bonds
E)a decrease in the target overnight rate

Accepted Answer

Changes in tax rates are a tool of fiscal policy, not monetary policy.

Question 17

Which of the following statements best describes the Bank of Canada? It is:
A)a publicly owned and publicly controlled central bank, whose basic goal is to provide income for the Government of Canada
B)a privately owned and publicly controlled central bank, whose basic goal is to earn profits for its owners
C)a publicly owned and publicly controlled central bank, whose basic goal is to control the money supply and interest rates in promoting the general economic welfare
D)a privately owned and publicly controlled central bank, whose basic function is to minimize the risks in chartered banking in order to make it a reasonably profitable industry
E)a privately owned and privately controlled bank, whose basic goal is to earn profits for its owners

Accepted Answer

The Bank of Canada is a publicly owned and publicly controlled central bank, whose central goal is to control the money supply and interest rates in promoting the general economic welfare. Its main objective is to "promote the economic and financial welfare of Canada," which is achieved through monetary policy, financial system stability, and serving as the banker and fiscal agent for the Canadian government. The Bank of Canada's primary responsibility is maintaining the stability of the Canadian economy, and it operates at arm's length from the government to ensure its independence.

Question 18

Assume that the Bank of Canada's policy is to stabilize the interest rate.If the economy begins to expand,the Bank of Canada:
A)would have to increase the money supply to keep the interest rate from falling
B)would have to decrease the money supply to keep the interest rate from rising
C)would have to increase the money supply to keep the interest rate from rising
D)can keep the interest rate stable without altering the money supply
E)will have to accept a lower interest rate if it does not alter the money supply

Accepted Answer

When the economy expands, demand for money increases, which puts upward pressure on interest rates. To stabilize the interest rate and prevent it from rising, the Bank of Canada would need to increase the money supply to meet the higher demand.

Question 19

Which of the following will tend to increase bank reserves?
A)the purchase of bonds in the open market by the Bank of Canada
B)federal tax collections
C)an increase in the target overnight rate
D)the sale of bonds in the open market by the Bank of Canada
E)a budget deficit by the federal government

Accepted Answer

When the Bank of Canada purchases bonds in the open market, it injects new money into the banking system. This increases the amount of reserves held by banks and expands the money supply.

Answer: B
 When federal tax collections are made, the funds are deposited into government accounts at banks. This increases the amount of reserves held by banks, as the funds cannot be immediately spent and instead sit in deposit accounts.

Answer: D
 When the Bank of Canada sells bonds in the open market, it withdraws money from the banking system. This reduces the amount of reserves held by banks and can lead to a contraction in the money supply.

Answer: E
 A budget deficit by the federal government involves increased spending relative to tax revenues, leading to an increase in government borrowing. This can result in the issuance of new bonds, which can be purchased by banks and increase their holdings of reserves.

Answer: C
 An increase in the target overnight rate by the Bank of Canada generally leads to a reduction in the amount of reserves held by banks. This is because banks are less likely to seek out short-term loans from other banks if the overnight rate is higher, reducing the amount of reserves exchanged in the overnight market.

Question 20

In terms of the aggregate demand and aggregate supply model,the sale of bonds by the Bank of Canada to chartered banks will:
A)increase aggregate supply
B)decrease aggregate supply
C)increase aggregate demand
D)decrease aggregate demand
E)increase both aggregate demand and aggregate supply

Accepted Answer

Selling bonds by the Bank of Canada to chartered banks will decrease the money supply in the economy. This will lead to a decrease in aggregate demand in the economy. As a result, the prices of goods and services will fall due to reduced purchasing power. Therefore, the correct answer is D, i.e., decrease aggregate demand.

Quiz 13: Monetary Policy

Assume that the Bank of Canada's policy is to keep the price level from either rising or falling.If aggregate supply decreases in the economy,the Bank of Canada:

-When the Bank of Canada engages in an easy money policy,the interest rate received on bonds tends to:

-An increase in the money supply will tend to:

If the Bank of Canada wants to reduce bank lending,it typically:

In terms of the aggregate demand and aggregate supply model,an expansionary monetary policy is designed to shift the aggregate:

The bank rate is the interest rate at which:

Monetary policies that cause an increase in the money supply:

If the demand for money increases and the monetary authorities want interest rates to remain unchanged,which of the following would be the most appropriate policy?

-If the economy's potential output is $550 billion,the monetary authorities should seek to:

The money supply (M) ,the interest rate (r) ,and aggregate demand (AD) are related such that a(n) :

-When the Bank of Canada engages in a tight money policy,the price of bonds tends to:

Which of the following statements best describes the cause-and-effect chain of an expansionary monetary policy?

The monetary authorities signal changes in monetary policy by:

The interest rate at which the Bank of Canada lends to CPA members is called:

-If the economy's potential output is $550 billion and the equilibrium interest rate is 7 percent:

Which of the following is not a tool of monetary policy?

Which of the following statements best describes the Bank of Canada? It is:

Assume that the Bank of Canada's policy is to stabilize the interest rate.If the economy begins to expand,the Bank of Canada:

Which of the following will tend to increase bank reserves?

In terms of the aggregate demand and aggregate supply model,the sale of bonds by the Bank of Canada to chartered banks will: