CH13 Monetary Policy in Canada

Question 1

Can the Bank of Canada directly set the money supply?
And the interest rates?

Answer 1

No
No

Question 2

What are the 2 things central banks can target to implement monetary policies?
What is the condition?

Answer 2

Money supply or interest rates

They cannot target both independently

Question 3

What are open-market operations?

Answer 3

Buying and selling government securities in the financial markets by the Central Banks

Question 4

What are the 3 reasons why the Bank of Canada does not target money supply?

Answer 4

1. It cannot control the process of deposit expansion carried out by commercial banks
2. Uncertainty regarding the Md curve slope
3. Uncertainty regarding the Md curve position at any given time

Question 5

What are the 3 advantages of implementing monetary policy by targeting the interest rate?

Answer 5

1. The Bank can control a particular interest rate
2. Uncertainty about the md slope and position doesn’t prevent the Bank of Canada from establishing its desired interest rate
3. Easier to communicate an interest-rate policy to the public

Question 6

Yields on government securities generally _______ as the term to maturity increases

Answer 6

Increase

Question 7

What is the overnight interest rate?

Answer 7

The interest rate that commercial banks charge one another for overnight loans

Question 8

What are the fixed announcement dates?

Answer 8

The 8 pre-specified dates when the Central Bank announces the targeted overnight interest rates

Question 9

What is the bank rate?

Answer 9

The interest rate the Bank of Canada charges commercial banks for loans, 0.25 percentage point above the target rate

Question 10

What is the percentage point target range (number)

Answer 10

0.5

(Minimum = 0.25 under the target rate
Maximum = 0.25 over the target rate)

Question 11

What type of monetary policy is reducing interest rate and why?

Answer 11

Expansionary policy because
it lead to an expansion of real GDP

Question 12

The Bank of Canada chooses to implement its monetary policy by influencing the
________ directly. The Bank then uses
_________ to accommodate the resulting change in money demand.

Answer 12

interest rate

open market operations

Question 13

The Bank of Canada can change the amount of currency in circulation through ___________. The Bank conducts these transactions to accommodate the changing demand for ________ by the commercial banks.

Answer 13

open market operations

cash reserves

Question 14

A contractionary monetary policy is one where the Bank of Canada ________ its target for the overnight interest rate.

Answer 14

increases

Question 15

Suppose a commercial bank wants to sell ​$800,000 of government securities the Bank of​ Canada, which willingly purchases them. What is the immediate change in the commercial​ bank’s total assets?

Answer 15

0 because -800,000 in bonds and + 800,000 in cash reserves

Question 16

Suppose commercial banks are facing an increased demand for loans. In this​ situation, the banks will typically​ ________ government bonds. From the central​ bank’s perspective, these transactions are​ open-market _______ and lead to a​ ________ level of money supply.

Answer 16

sell

purchases

higher