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Econ Chapter 29

Terms in this set (121)

1) Any central bank, including the Bank of Canada, can implement its monetary policy by directly influencing either ________ or ________, but not both.
A) money supply; money demand
B) aggregate supply; aggregate demand
C) the money supply; the interest rate
D) aggregate demand; the interest rate
E) the price level; the interest rate
C) the money supply; the interest rate
2) Consider the implementation of monetary policy. One difficulty in attempting to stabilize the economy by controlling the money supply is that
A) firms may be sensitive to changes in the rate of interest.
B) the Bank of Canada can print more money.
C) the commercial banks may choose not to hold excess reserves.
D) the money demand function may be unstable.
E) the Canadian government requires long-term loans.
D) the money demand function may be unstable.
3) If the Bank of Canada chooses to expand M2 by exactly $1 million, it could do so by
A) buying $1 million worth of government securities on the open market.
B) selling $1 million worth of government securities on the open market.
C) increasing reserves at the commercial banks by $1 million.
D) decreasing reserves at the commercial banks by $1 million.
E) None of the above - the Bank of Canada cannot precisely control the money supply.
E) None of the above - the Bank of Canada cannot precisely control the money supply.
4) In practice, it is not possible for the Bank of Canada to control the money supply because
A) the resulting effects on the value of the Canadian dollar are difficult to predict.
B) it cannot control the process of deposit creation carried out by the commercial banks.
C) it cannot control the amount of cash reserves that are injected into or withdrawn from the banking system.
D) it does not have the legal power to do so.
E) None of the above—the Bank of Canada could control the money supply if it chose to do so.
B) it cannot control the process of deposit creation carried out by the commercial banks.
5) Suppose the Bank of Canada were to implement an expansionary monetary policy by buying government securities on the open market, thereby increasing cash reserves in the banking system. If the commercial banks do not expand their lending in response, then
1) there would be no change in the money supply at all;
2) the Bank of Canada could force the commercial banks to expand their lending, based on regulations in the Bank Act;
3) the increase in the overall money supply would be smaller than the Bank of Canada may have intended.
A) 1 only
B) 2 only
C) 3 only
D) 1 or 2
E) 2 or 3
C) 3 only
6) One reason that the Bank of Canada does not try to influence the money supply directly is that
A) the Bank of Canada has many other policy tools with which it can influence aggregate demand.
B) the Bank of Canada does not have the mandate to change the money supply.
C) because the money demand curve is almost horizontal, changes in the money supply would have little or no effect on the interest rate.
D) because the investment demand curve is almost vertical, any change in the interest rate resulting from a change in money supply would have little or no effect on desired investment expenditure.
E) the slope of the money demand curve is not precisely known, and so the effect on the interest rate of a change in money supply is uncertain.
E) the slope of the money demand curve is not precisely known, and so the effect on the interest rate of a change in money supply is uncertain.
7) Most central banks, including the Bank of Canada, implement monetary policy by
A) controlling the money supply directly.
B) influencing a short-term interest rate directly.
C) influencing investment demand directly.
D) influencing the demand for money directly.
E) controlling the process of deposit creation in the commercial banking system.
B) influencing a short-term interest rate directly.
8) The Bank of Canada chooses to influence interest rates directly rather than influencing the money supply directly because
A) the former method does not require knowledge of the position of the money demand curve.
B) the deposit creation mechanism in the banking system is outside the full control of the Bank of Canada.
C) it is easier to communicate policy actions to the public by setting the interest rate.
D) the former method does not require knowledge of the slope of the money demand curve.
E) all of the above.
E) all of the above.
9) Refer to Figure 29-1. If the Bank of Canada raises the target interest rate to 3%, as shown in part (i), then it must accommodate the resulting ________ in quantity of money demanded by ________ in financial markets.
A) increase; selling government securities
B) decrease; selling government securities
C) increase; buying government securities
D) decrease; buying government securities
B) decrease; selling government securities
10) Refer to Figure 29-1. If the Bank of Canada pursues a(n) ________ monetary policy and raises the target interest rate to 3%, then the quantity of money demanded will ________.
A) contractionary; rise
B) contractionary; fall
C) expansionary; not change
D) expansionary; rise
E) expansionary; fall
B) contractionary; fall
11) Refer to Figure 29-1. If the Bank of Canada's goal is to increase the target interest rate to 3%, then the most effective approach is to
A) reduce the money supply to , as shown in part (ii), and then let the interest rate adjust to 3%.
B) increase the money supply to , as shown in part (ii), and then let the interest rate adjust to 3%.
C) allow the money supply to shift to by market forces, which will cause the interest rate to rise to 3%.
D) raise the interest rate to 3%, as shown in part (i), and then buy government securities in financial markets to accommodate the decline in the quantity of money demanded.
E) raise the interest rate to 3%, as shown in part (i), and then sell government securities in financial markets to accommodate the decline in the quantity of money demanded.
E) raise the interest rate to 3%, as shown in part (i), and then sell government securities in financial markets to accommodate the decline in the quantity of money demanded.
12) Refer to Figure 29-1. The Bank of Canada must be able to easily communicate its monetary policy actions to the public. Which approach is more amenable to this requirement, and why?
A) part (ii) - targeting the money supply: because an announcement of a 1% decrease in the money supply is more easily understood than an increase in the interest rate.
B) part (i) - targeting the interest rate: because the Bank of Canada can more easily instruct the commercial banks to raise their interest rates.
C) part (ii) - targeting the money supply: because the public can more easily understand that a decrease in reserves in the banking system makes it more difficult to get a loan or mortgage.
D) part (i) - targeting the interest rate: because changes in the interest rate are much more meaningful and understandable to the public than changes in the money supply.
D) part (i) - targeting the interest rate: because changes in the interest rate are much more meaningful and understandable to the public than changes in the money supply.
13) Refer to Figure 29-1. One advantage of implementing monetary policy by targeting the interest rate as shown in part (i), rather than targeting the money supply as shown in part (ii), is that
A) it is easier to get political support for changes in interest rates than for changes in the money supply.
B) it is almost impossible to change the money supply without passing new legislation.
C) the overall change in interest rates, and thus on aggregate demand, is more certain.
D) changes in interest rates have a stronger impact on aggregate demand than do changes in the money supply.
E) the position and slope of the money demand curve are known with certainty.
C) the overall change in interest rates, and thus on aggregate demand, is more certain.
14) In practise, the Bank of Canada uses monetary policy to reduce undesirable fluctuations in real GDP by
A) controlling business investment expenditures directly.
B) controlling government spending.
C) influencing market interest rates through changes in its target for the overnight interest rate.
D) directly influencing the money supply which affects the interest rate and hence, consumption and investment.
E) targeting the money supply directly.
C) influencing market interest rates through changes in its target for the overnight interest rate.
15) What is the "bank rate"?
A) The interest rate at which the Bank of Canada will lend funds to the Canadian government.
B) The interest rate at which the Bank of Canada will lend funds to commercial banks.
C) The interest rate that commercial banks charge their best customers.
D) The interest rate that the Bank of Canada pays on deposits from the commercial banks.
E) It is the same as a margin requirement.
B) The interest rate at which the Bank of Canada will lend funds to commercial banks.
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