Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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) True 
 B)False

Question 3

1. B)  D2. C)  S. D)  D3." class="answers-bank-image d-inline" rel="preload" >
-Refer to the above diagram for the market for money. The total demand for money is shown by:

Accepted Answer

A)   D1.
B)   D2.
C)   S.
D)   D3.E) A) and C)
F) B) and C)

Question 4

-Refer to the above diagram for the market for money. If each dollar held for transactions purposes is spent four times per year on the average, we can infer that the:

Accepted Answer

A)   real GDP is $800.
B)   nominal GDP is $800.
C)   money supply must be $800.
D)   nominal GDP is $1,200.E) A) and B)
F) B) and C)

Question 5

A monetary policy-caused reduction in the overnight lending rate will:

Accepted Answer

A)   increase the prime interest rate.
B)   decrease the size of the monetary multiplier.
C)   increase the Bank of Canada rate.
D)   decrease the prime interest rate.E) A) and C)
F) B) and D)

Question 6

In implementing monetary policy with respect to the Taylor Rule:

Accepted Answer

A)   the central bank is willing to tolerate a 2 percent target rate of inflation, and that the central bank should follow three rules when setting its target for the overnight lending rate.
B)   the central bank is willing to tolerate a 5 percent target rate of inflation, and that the central bank should follow three rules when setting its target for the overnight lending rate.
C)   the central bank is willing to tolerate any inflation rate, and overnight lending rate.
D)   the central bank chooses an inflation target regardless of the economic situation.E) A) and D)
F) A) and B)

Question 7

The asset demand for money is downward sloping because:

Accepted Answer

A)   the opportunity cost of holding money increases as the interest rate rises.
B)   it is more attractive to hold money at high interest rates than at low interest rates.
C)   bond prices rise as interest rates rise.
D)   the opportunity cost of holding money declines as the interest rate rises.E) A) and B)
F) A) and D)

Question 8

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

Accepted Answer

A)   increase aggregate supply.
B)   decrease aggregate supply.
C)   increase aggregate demand.
D)   decrease aggregate demand.E) B) and C)
F) C) and D)

Question 9

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

Accepted Answer

A)   aggregate demand curve rightward.
B)   aggregate demand curve leftward.
C)   aggregate supply curve rightward.
D)   aggregate supply curve leftward.E) None of the above
F) A) and B)

Question 10

A decline in the equilibrium level of GDP is most likely to be caused by:

Accepted Answer

A)   a downshift in the investment schedule.
B)   an upshift in the investment schedule.
C)   a downshift in the consumption schedule.
D)   an upshift in the saving schedule.E) A) and D)
F) A) and C)

Question 11

When the market for money is in equilibrium:

Accepted Answer

A)   the quantity of money demanded equals the quantity of money supplied.
B)   the interest rate is neither increasing nor decreasing.
C)   bond prices are stable.
D)   all of the above hold true.E) None of the above
F) All of the above

Question 12

The bank rate is the rate of interest at which:

Accepted Answer

A)   the Bank of Canada lends to chartered banks.
B)   financial institutions lend to some builders.
C)   the Bank of Canada lends to large corporations.
D)   chartered banks lend to large corporations.E) All of the above
F) A) and D)

Question 13

Assume that there is a 25 percent desired reserve ratio and that Bank of Canada buys $200 million worth of government securities. If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of:

Accepted Answer

A)   $600 million, and also by $600 million if the securities are purchased directly from chartered banks.
B)   $800 million, and also by $800 million if the securities are purchased directly from chartered banks.
C)   $600 million, but by $800 million if the securities are purchased directly from chartered banks.
D)   $800 million, but only by $600 million if the securities are purchased directly from chartered banks.E) B) and D)
F) B) and C)

Question 14

A fundamental policy dilemma facing the monetary authorities is that:

Accepted Answer

A)   banks are immune to monetary policy.
B)   desired reserves and the bank rate cannot be changed simultaneously.
C)   bank rate and open-market operations cannot be used simultaneously.
D)   interest rates and the money supply cannot be stabilized simultaneously.E) A) and B)
F) A) and C)

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) B) and C)
F) A) and C)

Question 16

In which case would the quantity of money demanded by the public tend to increase by the greatest amount?

Accepted Answer

A)   The interest rate increases and nominal GDP increases.
B)   The interest rate increases and nominal GDP decreases.
C)   The interest rate decreases and nominal GDP decreases.
D)   The interest rate decreases and nominal GDP increases.E) A) and C)
F) C) and D)

Question 17

Recently, the Bank of Canada has communicated changes in its monetary policy by announcing changes in its policy targets for the:

Accepted Answer

A)   growth of the money supply.
B)   overnight loans rate.
C)   prime interest rate.
D)   Canadian dollar-foreign currency exchange rate.E) A) and B)
F) B) and C)

Question 18

Assume the desired reserve ratio is 25 percent and the Winnipeg Bank borrows $10,000 from the Bank of Canada. As a result:

Accepted Answer

A)   chartered bank reserves are increased by $10,000.
B)   the supply of money automatically declines by $7,500.
C)   chartered bank reserves are increased by $7,500.
D)   the supply of money is automatically increased by $10,000.E) All of the above
F) C) and D)

Question 19

The largest single liability of the Bank of Canada is its outstanding advances to chartered banks.

Accepted Answer

A) True 
 B)False

Question 20

On the liability side of the Bank of Canada's consolidated balance sheet, the three main categories are:

Accepted Answer

A)   advances to chartered banks, government securities and deposits.
B)   treasury bills of Canada, government deposits and securities.
C)   chartered bank deposits, government deposits and notes in circulation.
D)   chartered banks deposits, advances to chartered banks and notes in circulation.E) A) and B)
F) A) and C)

Exam 13: Interest Rates and Monetary Policy

A monetary policy-caused reduction in the overnight lending rate will:

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

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When the market for money is in equilibrium:

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A fundamental policy dilemma facing the monetary authorities is that:

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-Refer to the above diagram for the market for money. If each dollar held for transactions purposes is spent four times per year on the average, we can infer that the:

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-Refer to the above diagram for the market for money. The total demand for money is shown by:

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

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In which case would the quantity of money demanded by the public tend to increase by the greatest amount?

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Assume that there is a 25 percent desired reserve ratio and that Bank of Canada buys $200 million worth of government securities. If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of:

Correct AnswerverifiedShow Answer

The largest single liability of the Bank of Canada is its outstanding advances to chartered banks.

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A decline in the equilibrium level of GDP is most likely to be caused by:

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

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In implementing monetary policy with respect to the Taylor Rule:

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The bank rate is the rate of interest at which:

Correct AnswerverifiedShow Answer

Assume the desired reserve ratio is 25 percent and the Winnipeg Bank borrows $10,000 from the Bank of Canada. As a result:

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

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.

Correct AnswerverifiedShow Answer

Recently, the Bank of Canada has communicated changes in its monetary policy by announcing changes in its policy targets for the:

Correct AnswerverifiedShow Answer

On the liability side of the Bank of Canada's consolidated balance sheet, the three main categories are:

Correct AnswerverifiedShow Answer

The asset demand for money is downward sloping because:

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