Question 1

In the consolidated balance sheet of the Bank of Canada,loans to chartered banks are:

Accepted Answer

The answer of In the consolidated balance sheet of the...

Question 2

-Refer to the above market for money diagram.If the interest rate was at 8 percent,people would:

Accepted Answer

If the interest rate is at 8 percent and is considered high, people would buy bonds to take advantage of the high returns, causing bond prices to rise and the interest rate to fall.

Question 3

Suppose the demand for money and the supply of money increase simultaneously.We can:

Accepted Answer

When both the demand for money and the supply of money increase simultaneously, it is not possible to predict what will happen to interest rates or bond prices. This is because the effect on each of these variables depends on factors such as the magnitude of the increase in demand and supply, the initial level of interest rates and bond prices, and the behavior of individuals and institutions in the money market. Therefore, the best choice is D, which states that we cannot predict what will happen to interest rates or bond prices.

Question 4

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

Accepted Answer

The Bank of Canada is a publicly owned and publicly controlled central bank whose basic goal is to control the money supply and interest rates and maintain price stability. It is an independent agency of the government, not privately owned, and its goal is not to provide income for the government or earn profits for owners or minimize risks in chartered banking.

Question 5

The price of a bond with no expiration date is originally $5,000 and it pays an annual interest payment of $500.If the price of the bond falls to $3,000,then the effective interest rate yield to a new buyer of the bond is:

Accepted Answer

To calculate the effective interest rate yield, we need to use the following formula:

Effective Interest Rate Yield = Annual Interest Payment / Current Market Price

Before the price fell: 
Effective Interest Rate Yield = $500 / $5,000 = 0.10 or 10%

After the price fell to $3,000: 
Effective Interest Rate Yield = $500 / $3,000 = 0.1667 or 16.67%

Therefore, the correct answer is B) 16.6 percent.

Question 6

The price of a bond having no expiration date is originally $8000 and has a fixed annual interest payment of $800.A fall in the price of the bond by $3,000 will provide a new buyer of the bond an interest rate of:

Accepted Answer

The answer of The price of a bond having no...

Question 7

-Refer to the above market for money diagram.If the interest rate was at 3 percent,people would:

Accepted Answer

If the interest rate is at 3 percent and is below the equilibrium rate, people would sell bonds to hold more money, causing bond prices to fall and the interest rate to rise.

Question 8

Which of the following is the most important function of the Bank of Canada?

Accepted Answer

While all of the functions listed are important, regulating the supply of money is the most important function of the Bank of Canada. This is because it has a direct impact on the economy, inflation, and overall financial stability. The Bank of Canada sets and adjusts interest rates and other monetary policy tools to manage the money supply and ensure price stability.

Question 9

-Refer to the above market for money diagram.Given D_m and S_m,an interest rate of i₃ is not sustainable because:

Accepted Answer

At an interest rate of i3, the demand for money exceeds the supply, leading to a shortage. This causes people to sell bonds to obtain money, decreasing bond prices and increasing interest rates.

Question 10

A bond with no expiration has an original price of $10,000 and a fixed annual interest payment of $1000.If the price of this bond increases by $2500,the interest rate in effect will:

Accepted Answer

The answer of A bond with no expiration has an...

Question 11

An important routine function of the Bank of Canada is:

Accepted Answer

The Bank of Canada is responsible for supplying the economy with paper currency. This helps ensure the smooth functioning of the economy and allows individuals and businesses to conduct transactions using physical cash. The Bank of Canada also plays other key roles in monetary policy and financial stability, but providing paper currency is one of its routine functions.

Question 12

In the consolidated balance sheet of the Bank of Canada,chartered bank reserves held by the Bank of Canada are:

Accepted Answer

The answer of In the consolidated balance sheet of the...

Question 13

The following information for a bond having no expiration date: bond price = $1,000;bond fixed annual interest payment = $100;bond annual interest rate = 10 percent.
-Refer to the above information.If the price of this bond falls by $200,the interest rate in effect will:

Accepted Answer

If the bond price falls to $800, the interest payment of $100 on the new price results in an interest rate of 12.5% ($100/$800), which is a rise of 2.5 percentage points from the original 10%.

Question 14

If there is an increase in nominal GDP,we would expect:

Accepted Answer

An increase in nominal GDP would signal economic growth, leading to an increase in demand for money as people seek to invest, save, and spend more. As the demand for money increases, interest rates will likely rise, since lenders will need to charge higher rates to meet the higher demand for loans. The rise in interest rates will also result in bond prices falling as the cost of borrowing increases, making fixed-income investments less attractive. Therefore, all of the above would occur if there is an increase in nominal GDP.

Question 15

The Bank of Canada:

Accepted Answer

The Bank of Canada does all of the above. It acts as a fiscal agent for the federal government by managing the government's public debt and providing banking services to the government. It supplies the economy with paper currency, as well as coins produced by the Royal Canadian Mint. And it acts as the chartered banks' bank, providing them with loans and acting as a lender of last resort in times of financial stress.

Question 16

The price of a bond with no expiration date is $10,000 and it has a fixed annual interest payment of $2,000.If the bond is sold to a new owner for a price of $12,500,then the effective interest rate yield on the bond is now:

Accepted Answer

The answer of The price of a bond with no...

Question 17

The following information for a bond having no expiration date: bond price = $1,000;bond fixed annual interest payment = $100;bond annual interest rate = 10 percent.
-Refer to the above information.If the price of this bond increases to $1,250,the interest rate in effect will:

Accepted Answer

The interest rate is calculated as the fixed annual interest payment divided by the bond price. If the bond price increases to $1,250, the interest rate becomes $100 / $1,250 = 0.08 or 8 percent.

Question 18

A bond with no expiration has an original price of $10,000 and a fixed annual interest payment of $1000.If the price of this bond decreases by $2000,the interest rate in effect will:

Accepted Answer

The yield or interest rate of a bond is inversely related to its price. If the price decreases by $2000, the new price will be $8000, and the yield will increase to $1000/$8000 = 0.125 or 12.5%. Since the original yield was $1000/$10,000 = 0.10 or 10%, the change in yield is 2.5 percentage points. Therefore, the correct answer is (D) increase by 2.5 percentage points.

Question 19

Which of the following is an asset on the balance sheet of the Bank of Canada?

Accepted Answer

The answer of Which of the following is an asset...

Question 20

-Refer to the above market for money diagram.The equilibrium interest rate is:

Accepted Answer

The equilibrium interest rate is where the money supply and money demand curves intersect, which is at i₂.

Quiz 15: Interest Rates and Monetary Policy