Question 1

A shortcoming of monetary policy is that:

Accepted Answer

A)   a severe recession may undermine business confidence to the degree that even a reduction in interest rate does not increase the investment.
B)   a severe recession will increase the investment demand which contributes to inflation.
C)   a severe recession will increase the interest rate and thus lowers the investment.
D)   a severe recession will reduce interest rate and increases investment demand.E) A) and C)
F) B) and C)

Question 2

If the demand for money and the supply of money both decrease,we can conclude that at the equilibrium:

Accepted Answer

A)   interest rate will decline,but we cannot predict the change in the equilibrium quantity of money.
B)   quantity of money and the equilibrium interest rate will both increase.
C)   quantity of money will increase,but we cannot predict the change in the equilibrium interest rate.
D)   quantity of money will decline,but we cannot predict the change in the equilibrium interest rate.E) B) and D)
F) A) and B)

Question 3

A decrease in the rate of interest would:

Accepted Answer

A)   decrease the opportunity cost of holding money.
B)   increase the transactions demand for money.
C)   increase the asset demand for money.
D)   decrease the price of bonds.E) All of the above
F) None of the above

Question 4

The following is a simplified consolidated balance sheet for the chartered banking system and the Bank of Canada.Assume a desired reserve ratio of 5 percent for the chartered banks.All figures are in billions of dollars.
CONSOLIDATED BALANCE SHEET: CHARTERED BANKING SYSTEM
  BALANCE SHEET: BANK OF CANADA
 
-Assume that a single chartered bank has no excess reserves and that the desired reserve ratio is 20 percent.If this bank sells a bond for $1,000 to the Bank of Canada,it can expand its loans by a maximum of:

Accepted Answer

A)   $1000
B)   $2000
C)   $200
D)   $800E) A) and D)
F) A) and C)

Question 5

When the Bank of Canada wants to see an increase in the interest rates,it:

Accepted Answer

A)   sells government securities by entering into SRA (a sale and repurchase agreement) .
B)   buys government securities by entering into SRA (a sale and repurchase agreement) .
C)   sells government securities by entering into SPRA (special purchase and resale agreement) .
D)   buys government securities by entering into SPRA (special purchase and resale agreement) .E) A) and D)
F) A) and C)

Question 6

Which is considered a strength of monetary policy compared to fiscal policy?

Accepted Answer

A)   the ability to increase the velocity of money
B)   the ability to decrease the velocity of money
C)   its cyclical asymmetry.
D)   its protection from political pressure.E) None of the above
F) All of the above

Question 7

The economy is experiencing high unemployment and a low rate of economic growth and the Bank of Canada decides to pursue an expansionary monetary policy.Which action by the Bank of Canada would be most consistent with this policy?

Accepted Answer

A)   buying government securities
B)   selling government securities
C)   raising the desired reserve ratio
D)   raising the bank rateE) B) and C)
F) All of the above

Question 8

Suppose Canada is experiencing a 12 percent rate of unemployment with stable prices and a trade deficit.All else equal,the use of appropriate monetary policy to reduce unemployment would:

Accepted Answer

A)   cause the dollar to appreciate in value.
B)   have no impact upon our trade deficit.
C)   decrease our trade deficit.
D)   increase our trade deficit.E) B) and D)
F) A) and B)

Question 9

International flows of financial capital in response to interest rate changes in Canada:

Accepted Answer

A)   weaken domestic monetary policy through an offsetting net export effect.
B)   strengthen domestic monetary policy through a supporting net export effect.
C)   strengthen domestic fiscal policy through an offsetting net export effect.
D)   weaken domestic monetary policy through an offsetting real wealth effect.E) A) and B)
F) B) and C)

Question 10

Assume that the desired reserve ratio for the chartered banks is 25 percent.If Bank of Canada buys $3 billion in government securities from chartered banks we can say that,as a result of this transaction,the lending ability of the chartered banking system will:

Accepted Answer

A)   decrease by $9 billion.
B)   increase by $9 billion.
C)   increase by $15 billion.
D)   increase by $12 billion.E) None of the above
F) All of the above

Question 11

Refer to the market for money diagram below.Other things being equal,if the Bank of Canada increases the stock of money,the:

Accepted Answer

A)   S curve would shift leftward and the equilibrium interest rate would rise.
B)   S curve would shift rightward and the equilibrium interest rate would fall.
C)   D would shift leftward and the equilibrium interest rate would fall.
D)   S curve would shift rightward,but the effect on the equilibrium interest rate would be uncertain.E) B) and D)
F) All of the above

Question 12

What is one of the advantages of monetary policy over fiscal policy?

Accepted Answer

A)   its control over the size of Federal budget deficits
B)   the quickness with which it can be used
C)   the opportunity for broad political influence
D)   its domination of major sectors of the economyE) B) and C)
F) A) and D)

Question 13

The transactions demand for money will decrease when aggregate income decreases.

Accepted Answer

A) True 
 B)False

Question 14

The problem of "cyclical asymmetry" refers to the notion that:

Accepted Answer

A)   monetary policy may be more successful in slowing expansions and controlling inflation than in extracting the economy from severe recession.
B)   the monetary authorities have been less willing to use an expansionary monetary policy than they have a restrictive monetary policy.
C)   cyclical downswings are typically of longer duration than cyclical upswings.
D)   an expansionary monetary policy can force an expansion of the money supply,but a restrictive monetary policy may not achieve a contraction of the money supply.E) B) and D)
F) All of the above

Question 15

The Bank of Canada often communicates its intentions to tighten or loosen monetary policy by announcing a change in targets for:

Accepted Answer

A)   exchange rate.
B)   overnight lending rate.
C)   prime interest rate.
D)   the velocity of money.E) A) and C)
F) B) and C)

Question 16

All else equal,an expansionary monetary policy in Canada:

Accepted Answer

A)   increases Canadian imports.
B)   increases the international value of the dollar.
C)   reduces the foreign demand for Canadian dollars.
D)   aggravates an existing Canadian trade deficit.E) C) and D)
F) B) and D)

Question 17

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

Accepted Answer

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 banksE) A) and B)
F) None of the above

Question 18

-Refer to the above information.The equilibrium interest rate is:

Accepted Answer

A)   2 percent.
B)   4 percent.
C)   6 percent.
D)   8 percent.E) B) and C)
F) A) and B)

Question 19

Which one is considered a limitation of monetary policy?

Accepted Answer

A)   the cause-effect chain
B)   its cyclical asymmetry
C)   its isolation from political pressure
D)   the speed with which it can be implementedE) B) and D)
F) All of the above

Question 20

Which of the following best describes what occurs when monetary authorities sell government securities?

Accepted Answer

A)   There is a decrease in the size of chartered banks' excess reserves,the money supply increases,and interest rates fall,thereby causing a decrease in investment spending and real GDP.
B)   There is a decrease in the size of chartered banks' excess reserves,the money supply decreases,and the interest rates rise,thereby causing a decrease in investment spending and real GDP.
C)   There is a decrease in the size of chartered banks' excess reserves,the money supply decreases,and interest rates rise,thereby causing an increase in investment spending and real GDP.
D)   There is an increase in the size of chartered bank reserves,the money supply increases,and interest rates fall,thereby causing an increase in investment spending and real GDP.E) B) and D)
F) C) and D)

Exam 15: Interest Rates and Monetary Policy

Assume that the desired reserve ratio for the chartered banks is 25 percent.If Bank of Canada buys $3 billion in government securities from chartered banks we can say that,as a result of this transaction,the lending ability of the chartered banking system will:

Correct Answer
verified

The Bank of Canada often communicates its intentions to tighten or loosen monetary policy by announcing a change in targets for:

Correct Answer
verified

International flows of financial capital in response to interest rate changes in Canada:

Correct Answer
verified

-Refer to the above information.The equilibrium interest rate is:

Correct Answer
verified

The transactions demand for money will decrease when aggregate income decreases.

Correct Answer
verified

Suppose Canada is experiencing a 12 percent rate of unemployment with stable prices and a trade deficit.All else equal,the use of appropriate monetary policy to reduce unemployment would:

Correct Answer
verified

A shortcoming of monetary policy is that:

Correct Answer
verified

The economy is experiencing high unemployment and a low rate of economic growth and the Bank of Canada decides to pursue an expansionary monetary policy.Which action by the Bank of Canada would be most consistent with this policy?

Correct Answer
verified

What is one of the advantages of monetary policy over fiscal policy?

Correct Answer
verified

Correct Answer
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All else equal,an expansionary monetary policy in Canada:

Correct Answer
verified

When the Bank of Canada wants to see an increase in the interest rates,it:

Correct Answer
verified

Which of the following best describes what occurs when monetary authorities sell government securities?

Correct Answer
verified

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

Correct Answer
verified

Refer to the market for money diagram below.Other things being equal,if the Bank of Canada increases the stock of money,the:

Correct Answer
verified

Which is considered a strength of monetary policy compared to fiscal policy?

Correct Answer
verified

Which one is considered a limitation of monetary policy?

Correct Answer
verified

A decrease in the rate of interest would:

Correct Answer
verified

The problem of "cyclical asymmetry" refers to the notion that:

Correct Answer
verified

If the demand for money and the supply of money both decrease,we can conclude that at the equilibrium:

Correct Answer
verified

Exam 15: Interest Rates and Monetary Policy

Assume that the desired reserve ratio for the chartered banks is 25 percent.If Bank of Canada buys $3 billion in government securities from chartered banks we can say that,as a result of this transaction,the lending ability of the chartered banking system will:

Correct AnswerverifiedShow Answer

The Bank of Canada often communicates its intentions to tighten or loosen monetary policy by announcing a change in targets for:

Correct AnswerverifiedShow Answer

International flows of financial capital in response to interest rate changes in Canada:

Correct AnswerverifiedShow Answer

-Refer to the above information.The equilibrium interest rate is:

Correct AnswerverifiedShow Answer

The transactions demand for money will decrease when aggregate income decreases.

Correct AnswerverifiedShow Answer

Suppose Canada is experiencing a 12 percent rate of unemployment with stable prices and a trade deficit.All else equal,the use of appropriate monetary policy to reduce unemployment would:

Correct AnswerverifiedShow Answer

A shortcoming of monetary policy is that:

Correct AnswerverifiedShow Answer

The economy is experiencing high unemployment and a low rate of economic growth and the Bank of Canada decides to pursue an expansionary monetary policy.Which action by the Bank of Canada would be most consistent with this policy?

Correct AnswerverifiedShow Answer

What is one of the advantages of monetary policy over fiscal policy?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

All else equal,an expansionary monetary policy in Canada:

Correct AnswerverifiedShow Answer

When the Bank of Canada wants to see an increase in the interest rates,it:

Correct AnswerverifiedShow Answer

Which of the following best describes what occurs when monetary authorities sell government securities?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Refer to the market for money diagram below.Other things being equal,if the Bank of Canada increases the stock of money,the:

Correct AnswerverifiedShow Answer

Which is considered a strength of monetary policy compared to fiscal policy?

Correct AnswerverifiedShow Answer

Which one is considered a limitation of monetary policy?

Correct AnswerverifiedShow Answer

A decrease in the rate of interest would:

Correct AnswerverifiedShow Answer

The problem of "cyclical asymmetry" refers to the notion that:

Correct AnswerverifiedShow Answer

If the demand for money and the supply of money both decrease,we can conclude that at the equilibrium:

Correct AnswerverifiedShow Answer

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