Question 1

To have an independent monetary policy and target inflation, the Bank of Canada must allow the Canadian Dollar to float.

Accepted Answer

If the Bank of Canada wants to have an independent monetary policy and target inflation, it must allow the Canadian Dollar to float freely in the foreign exchange market. This means that the exchange rate of the Canadian Dollar will be determined by market forces of supply and demand, rather than being fixed to a certain level or to another currency. This flexibility allows the central bank to adjust interest rates and monetary conditions as needed to achieve its policy objectives, without facing external constraints from a fixed exchange rate regime.

Question 2

The job of the monetary authorities in limiting the supply of money may be made more complex if chartered banks initially have substantial excess reserves.

Accepted Answer

If chartered banks initially have substantial excess reserves, they may be less dependent on central bank reserves and may be able to increase lending without requiring additional reserves from the central bank. This can complicate the central bank's ability to limit the money supply through traditional open market operations.

Question 3

An expansionary monetary policy may be more effective than a restrictive monetary policy because chartered banks may decide to hold a large quantity of excess reserves.

Accepted Answer

A restrictive monetary policy, which involves reducing the money supply and increasing interest rates, can lead to a decrease in bank lending and an increase in excess reserves. An expansionary monetary policy, which involves increasing the money supply and reducing interest rates, can encourage banks to lend out their excess reserves and stimulate economic growth. Therefore, an expansionary monetary policy may be more effective in increasing lending and stimulating economic activity, rather than a restrictive monetary policy.

Question 4

Other things equal, an expansionary monetary policy will shift the economy's aggregate demand curve to the right.

Accepted Answer

Expansionary monetary policy involves increasing the money supply and lowering interest rates, which stimulates spending and investment, leading to an increase in aggregate demand. As a result, the aggregate demand curve shifts to the right.

Question 5

The major advantages of monetary policy include its flexibility, speed, and political acceptability.

Accepted Answer

Monetary policy can be adjusted quickly to respond to changing economic conditions, and it generally has broad political support because it is seen as a more neutral and less intrusive way to manage the economy compared to fiscal policy. Additionally, monetary policy can be implemented in a variety of ways, such as adjusting interest rates or changing the money supply, giving policymakers flexibility in how they respond to economic challenges.

Question 6

A restrictive monetary policy reduces investment spending and shifts the economy's aggregate demand curve to the right.

Accepted Answer

A restrictive monetary policy is used to slow down inflation by decreasing the money supply and increasing interest rates, which makes borrowing more expensive. This reduces investment spending, as businesses are less likely to take out loans to invest in their operations. As a result, the aggregate demand curve shifts to the left, as there is less demand for goods and services in the economy.

Question 7

An expansionary monetary policy will decrease net exports.

Accepted Answer

The answer of An expansionary monetary policy will decrease net...

Question 8

An expansionary monetary policy reduces the supply of money.

Accepted Answer

An expansionary monetary policy increases the supply of money.

Question 9

The reason for the Bank of Canada to have a range for its inflation targeting is that some of the components of the CPI, fluctuate a lot.

Accepted Answer

Yes, some components of the CPI, such as energy and food prices, can experience significant short-term fluctuations, which can make it difficult to maintain a precise target for inflation. The use of a range allows for some flexibility in responding to these fluctuations while still aiming for overall price stability in the long term.

Question 10

Most economists feel that changes in the interest rate are more likely to affect investment spending than consumer spending.

Accepted Answer

This is because changes in interest rates can make it more or less expensive for businesses to borrow money and invest in capital goods, while consumer spending is driven more by factors such as income, savings, and consumer confidence.

Question 11

A restrictive monetary policy invoked to reduce inflation is compatible with the goal of correcting a trade deficit.

Accepted Answer

The answer of A restrictive monetary policy invoked to reduce...

Question 12

A restrictive monetary policy may not be effective if the investment-demand curve shifts to the left.

Accepted Answer

The answer of A restrictive monetary policy may not be...

Question 13

Because of the liquidity trap, the Bank of Canada's creation of billions of dollars in excess reserves during the great recession had little or no effect on lending by the chartered banks.

Accepted Answer

The liquidity trap occurs when interest rates are so low that monetary policy is ineffective, as individuals and businesses hold on to cash rather than spending or investing it. This means that even with the creation of excess reserves by the Bank of Canada, the chartered banks may still be hesitant to lend due to a lack of demand for loans. Therefore, the creation of excess reserves would have little or no effect on lending by the chartered banks during the great recession.

Question 14

Quantitative easing refers to the purchasing of private sector assets by a country's central bank in order to provide liquidity to the financial system.

Accepted Answer

Quantitative easing involves the central bank purchasing assets such as government bonds, corporate bonds, and mortgage-backed securities in order to increase the money supply and lower interest rates. This provides liquidity to the financial system and encourages economic growth.

Question 15

Monetary policy is subject to less political pressure than fiscal policy.

Accepted Answer

Monetary policy is generally implemented by an independent central bank, which is less subject to political pressure than fiscal policy, which depends on the actions of elected officials and government agencies.

Question 16

An expansionary monetary policy is designed to correct a problem of high unemployment and sluggish economic growth.

Accepted Answer

An expansionary monetary policy involves increasing the money supply and lowering interest rates, which can stimulate spending and investment, leading to increased economic growth and potentially lower unemployment.

Quiz 13: Interest Rates and Monetary Policy