Question 1

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 and maintain price stability and it is an independent agency of government.
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.

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 government, which means that it operates independently of political control, but is accountable to parliament and the public. Its goal is not to provide income for the government, earn profits for its owners, or minimize risks in chartered banking.

Question 2

-Refer to the above market for money diagram. Given D_m and S_m, an interest rate of i₃ is not sustainable because: A) the supply of bonds in the bond market will decline and the interest rate will rise. B) the supply of bonds in the bond market will increase and the interest rate will decline. C) the demand for bonds in the bond market will decline and the interest rate will rise. D) the demand for bonds in the bond market will rise and the interest rate will fall.

Accepted Answer

The answer of 
-Refer to the above market for money...

Question 3

Refer to the above market for money diagram. If the interest rate was at 8 percent, people would:
A) sell bonds, which would cause bond prices to fall and the interest rate to fall.
B) buy bonds, which would cause bond prices to rise and the interest rate to fall.
C) have insufficient liquidity, which would cause them to reduce their spending on consumer goods.
D) buy bonds, which would cause bond prices to fall and the interest rate to rise.

Accepted Answer

At an interest rate of 8 percent, people would find it attractive to invest in bonds as they offer a higher return. This increased demand for bonds would cause bond prices to rise and subsequently, the interest rate to fall. Therefore, people would buy bonds, which would cause bond prices to rise and interest rates to fall.

Question 4

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:
A) rise by 2.5 percentage points.
B) rise by 5 percentage points.
C) fall by 2.5 percentage points.
D) fall by 5 percentage points.

Accepted Answer

The answer of The following information for a bond having...

Question 5

Which of the following is the most important function of the Bank of Canada?
A) the collection or clearing of cheques among chartered banks
B) regulating the supply of money
C) acting as a fiscal agent for the federal government
D) holding the reserves of chartered banks

Accepted Answer

Regulating the supply of money is the most important function of the Bank of Canada as it helps to maintain stability in the economy through monetary policy. The other functions listed are important, but not as critical to the overall stability of the economy.

Question 6

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. The maximum money-creating potential of the chartered banking system is:
A) $5.
B) $19.
C) $20.
D) $0.

Accepted Answer

The maximum money-creating potential of the banking system is determined by the reserve requirement ratio. Assuming a reserve requirement ratio of 10 percent, the bank can loan out 90 percent of the deposits it receives. Given that the bond price is $1,000 and the fixed annual interest payment is $100, the bond's effective rate of interest is 10 percent. Therefore, the bank can create a maximum of $20 ($1,000 x 0.9 x 0.1) in new money by lending out the deposit.

Question 7

The Bank of Canada:
A) acts as a fiscal agent for the federal government.
B) supplies the economy with paper currency.
C) acts as the chartered banks' bank.
D) does all of the above.

Accepted Answer

The Bank of Canada acts as a fiscal agent for the federal government by managing the government's public debt programs and holding the government's bank accounts. It supplies the economy with paper currency and also manages the country's monetary policy. In addition, the Bank of Canada acts as the chartered banks' bank by providing them with overnight loans and serving as a lender of last resort.

Question 8

In the consolidated balance sheet of the Bank of Canada, loans to chartered banks are:
A) a liability of the Bank of Canada and chartered banks.
B) an asset of the Bank of Canada and chartered banks.
C) a liability of the Bank of Canada and an asset for chartered banks.
D) an asset of the Bank of Canada and a liability for chartered banks.

Accepted Answer

Loans to chartered banks are an asset of the Bank of Canada because they represent funds that the Bank has lent out. They are a liability for the chartered banks because they owe money to the Bank of Canada. Therefore, the loans to chartered banks are an asset of the Bank of Canada and a liability for chartered banks.

Question 9

If there is an increase in nominal GDP, we would expect:
A) the demand for money to increase.
B) the interest rate to rise.
C) bond prices to fall.
D) all of the above to occur.

Accepted Answer

An increase in nominal GDP would lead to an increase in the demand for money as individuals and firms seek to hold more cash to finance their increased spending. This increase in demand for money would put upward pressure on interest rates, as lenders would charge higher rates to meet the increased demand for loans. Higher interest rates would, in turn, cause bond prices to fall, as the fixed interest payments on existing bonds become less attractive compared to the higher returns available from newer bonds. Therefore, all of the above options would occur.

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:
A) decrease by 1 percentage point.
B) decrease by 2 percentage points.
C) increase by 1 percentage point.
D) increase by 2 percentage points.

Accepted Answer

The interest rate is calculated using the formula: Interest Rate = Annual Interest Payment / Bond Price. 
Initially, the interest rate is 10% (1000/10000). 
When the bond price increases by $2500, the new bond price is $12,500. 
Using the same formula, the new interest rate is 8% (1000/12500). 
Therefore, the interest rate decreases by 2 percentage points.

Question 11

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:
A) 14.4 percent.
B) 16.6 percent.
C) 11.0 percent.
D) 9.0 percent.
McConnell - Chapter 13 #70

Accepted Answer

The effective interest rate yield is calculated by dividing the annual interest payment by the current price of the bond.

At the original price of $5,000, the yield would be: 
$500 / $5,000 = 0.10 or 10%

At the new price of $3,000, the yield would be: 
$500 / $3,000 = 0.1667 or 16.67%

Therefore, the answer is B) 16.6 percent.

Question 12

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:
A) 10 percent.
B) 12 percent.
C) 14 percent.
D) 16 percent.

Accepted Answer

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

Question 13

In the consolidated balance sheet of the Bank of Canada, chartered bank reserves held by the Bank of Canada are:
A) a liability of the Bank of Canada and chartered banks.
B) an asset of the Bank of Canada and chartered banks.
C) a liability of the chartered banks and an asset for the Bank of Canada.
D) an asset of the chartered banks and a liability for the Bank of Canada.

Accepted Answer

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

Question 14

Refer to the above market for money diagram. If the interest rate was at 3 percent, people would:
A) sell bonds, which would cause bond prices to fall and the interest rate to rise.
B) buy bonds, which would cause bond prices to fall and the interest rate to rise.
C) sell bonds, which would cause bond prices to rise and the interest rate to rise.
D) buy bonds, which would cause bond prices to rise but have an uncertain effect upon the interest rate.

Accepted Answer

According to the diagram, at an interest rate of 3 percent, the quantity of money demanded is greater than the quantity supplied, which creates an excess demand for money. To acquire more money, people will sell their bonds, which will increase the supply of bonds and decrease their prices. As bond prices fall, the interest rate will rise. Therefore, choice A is the correct answer.

Question 15

An important routine function of the Bank of Canada is:
A) to help new chartered banks sell capital stock.
B) to supply the economy with paper currency.
C) to advise chartered banks as to the most profitable ways of reinvesting profits.
D) to help chartered banks develop correspondent relationships with foreign banks.

Accepted Answer

The Bank of Canada is responsible for supplying the economy with paper currency. This is a routine function that helps to ensure that there is adequate money supply in the economy to facilitate transactions and economic activity. The other options mentioned are not routine functions of the Bank of Canada.

Question 16

Suppose the demand for money and the supply of money increase simultaneously. We can:
A) expect the interest rate to rise and bond prices to fall.
B) expect the interest rate to fall and bond prices to rise.
C) the nominal GDP to expand.
D) not predict what will happen to interest rates or bond prices.

Accepted Answer

Since both the demand for money and supply of money have increased, we cannot predict what will happen to interest rates or bond prices. The changes in demand and supply may offset each other, leading to no change in interest rates or bond prices. Therefore, D is the best answer.

Question 17

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:
A) decrease by 1.5 percentage points.
B) decrease by 2.5 percentage points.
C) increase by 1.5 percentage points.
D) increase by 2.5 percentage points.

Accepted Answer

The interest rate in effect is the fixed annual interest payment divided by the original price:

$1000 / $10,000 = 0.1 or 10%

If the price of the bond decreases by $2000, then the new price is:

$10,000 - $2000 = $8000

To keep the same interest rate in effect, the annual interest payment must remain at $1000.

Therefore, the new interest rate in effect is:

$1000 / $8000 = 0.125 or 12.5%

The difference between the old interest rate and the new interest rate is:

10% - 12.5% = -2.5%

Therefore, the interest rate in effect has increased by 2.5 percentage points.

The correct answer is D.

Question 18

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:
A) 22 percent.
B) 18 percent.
C) 17 percent.
D) 16 percent.

Accepted Answer

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

Question 19

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:
A) fall to 9 percent.
B) fall to 8 percent.
C) rise to 11 percent.
D) rise to 12 percent.

Accepted Answer

When the bond price increases, the yield or return on investment decreases. In this case, the bond price has increased by $250, so the yield has decreased by $250/$1,000 = 0.25 = 25%. Therefore, the new yield is 10% - 25% = 7.5%. However, the bond still pays the same fixed interest payment of $100, which is now 100/1,250 = 8%. Therefore, the interest rate in effect will fall to 8 percent.

Question 20

-Refer to the above market for money diagram. The equilibrium interest rate is: A) i₁. B) i₂. C) i₃. D) not determinable without further information.

Accepted Answer

The answer of 
-Refer to the above market for money...

Quiz 13: Interest Rates and Monetary Policy

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

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

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

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:

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

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. The maximum money-creating potential of the chartered banking system is:

The Bank of Canada:

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

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

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:

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:

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:

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

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

An important routine function of the Bank of Canada is:

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

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:

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:

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:

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

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