Chapter 11 MCQ

Question 1

Monetary policy refers to

A.
adjusting the supply of money and interest rates to achieve steady​ growth, full​ employment, and stable prices.
B.
identifying international exchange rates that achieve maximum exports.
C.
identifying international exchange rates that achieve steady​ growth, full​ employment, and stable prices.
D.
changing the supply of money and interest rates to minimize imports.

Answer 1

A.

In​ Canada, the Bank of Canada is responsible for monetary policy. The Bank of Canada aims for an inflation control target that will achieve steady​ growth, full​ employment, and stable prices.

Question 2

When there is price​ stability,

A.
the inflation rate is low enough that it does not significantly affect​ people’s economic decisions.
B.
the inflation rate is equal to the exchange rate.
C.
the inflation rate is equal to the growth rate of the economy.
D.
there is no inflation.

Answer 2

A.

When there is price​ stability, inflation is low enough that it does not significantly affect​ people’s economic decisions.

Question 3

An​ inflation-control target is

A.
based on a version of CPI that excludes products and services with the most volatile prices.
B.
a range of inflation rates set as a target by a central bank as a monetary policy objective.
C.
an operational guide.
D.
achieved in cooperation with the United States.

Answer 3

B.

Question 4

Since​ 1991, the Government of Canada and the Bank of Canada agreed

A.
to meet a GDP growth target set by the government.
B.
to use monetary policy to keep the inflation rate at zero.
C.
to use monetary policy to keep the inflation rate between one percent and three percent.
D.
to contain the annual rate of inflation between three percent and five percent.

Answer 4

C.

Since​ 1991, the Government of Canada and the Bank of Canada have agreed to two specific objectives for monetary​ policy:
1. To contain the annual rate of inflation between one percent and three​ percent, as measured by increases in the Consumer Price Index​ (CPI). This is called the​ inflation-control target.
2. To use monetary policy to achieve the two percent midpoint of that range.

Question 5

When the economy is slowing down​, the Bank of Canada

A.
steps on the brake by lowering interest rates.
B.
steps on the gas by raising interest rates.
C.
steps on the brake by raising interest rates.
D.
steps on the gas by lowering interest rates.

Answer 5

D.

When the economy is slowing down​, the Bank of Canada steps on the gas by lowering interest rates. When the economy is speeding too fast​, the Bank of Canada steps on the brake by raising interest rates.

Question 6

When the economy is speeding too fast​, the Bank of Canada

A.
steps on the gas by lowering interest rates.
B.
steps on the brake by raising interest rates.
C.
steps on the brake by lowering interest rates.
D.
steps on the gas by raising interest rates.

Answer 6

B.

When the economy is speeding too fast​, the Bank of Canada steps on the brake by raising interest rates. When the economy is slowing down​, the Bank of Canada steps on the gas by lowering interest rates.

Question 7

Since a change in interest rates takes

A.
three to five months to affect the​ economy, the Bank of Canada must act quickly.
B.
84 months to affect the​ economy, the Bank of Canada relies on​ bankers’ economic predictions.
C.
up to 24 months to affect the​ economy, the Bank of Canada hires economists to estimate what they think will happen to the economy.
D.
an unpredictable period to affect the​ economy, the Bank of Canada tries to keep monetary policy steady.

Answer 7

C.

The impact on the economy of lower or higher interest rates takes up to 24 months. The Bank of Canada has to predict the impact of a change in interest rates on the​ economy, and especially on the inflation​ rate, two years in​ advance!
There is no crystal ball foretelling the​ future, so the Bank hires economists to estimate what they think will happen to the economy. The economists use the aggregate supply and aggregate demand model to make predictions that the Bank of Canada uses to decide whether to​ raise, lower, or hold interest rates steady.

Question 8

The Bank of Canada uses open market operations to change interest rates. Selling bonds

A.
increases the money supply and lowers bond​ prices, raising interest rates.
B.
decreases the money supply and lowers bond​ prices, raising interest rates.
C.
decreases the money supply and raises bond​ prices, raising interest rates.
D.
decreases the money supply and lowers bond​ prices, lowering interest rates.

Answer 8

B.

The Bank of Canada is a major player in the bond market. When the Bank of Canada sells ​bonds, there is a big increase in the supply of ​bonds, causing the price of bonds to fall. Bond prices and interest rates are inversely related. A fall in the price of bonds raises the interest rate on bonds.

Question 9

The central bank of Dinotopia has the same​ inflation-control target as the Bank of Canada. The CPI inflation rate in Dinotopia was 0.3 percent in September 2014 and 1.3 percent in February 2014. The CPI inflation rate was

A.
in the target range in both February and September.
B.
outside the target range in both September and February.
C.
in the target range in September but not February.
D.
in the target range in February but not September.

Answer 9

D.

​Inflation-control target​-range of inflation rates are set by a central bank as a monetary policy objective.
​- Bank of​ Canada’s target is an annual inflation rate of one to three percent as measured by the CPI.
Thus the CPI inflation rate was in the target range in February but not September.

Question 10

To increase aggregate​ demand, the Bank of Canada can

A.
lower the overnight​ rate, increasing the money supply.
B.
lower the overnight​ rate, decreasing the money supply.
C.
raise the overnight​ rate, decreasing the money supply.
D.
raise the overnight​ rate, increasing the money supply.

Answer 10

A.

​- In a recessionary​ gap, the Bank of Canada lowers interest rates to increase aggregate demand and accelerate the economy. The Bank of Canada buys​ bonds, which increases the money supply. By doing so the Bank of Canada lowers the overnight rate. The overnight rate then determines all other interest rates that banks charge their customers​ (all these rates​ fall), and this in turn accelerates the economy.
​- In an inflationary​ gap, the Bank of Canada raises interest rates to decrease aggregate demand to slow down the economy. The Bank of Canada sells​ bonds, which decreases the money supply. By doing so the Bank of Canada raises the overnight rate. The overnight rate then determines all other interest rates that banks charge their customers ​ (all these rates​ rise), and this in turn slows down the economy.

Question 11

When the Bank of Canada buys bonds on the bond​ market, this

A.
decreases chartered bank loans to the public.
B.
raises interest rates.
C.
increases chartered bank reserves.
D.
decreases chartered bank reserves.

Answer 11

C.

​- In a recessionary​ gap, the Bank of Canada lowers interest rates to increase aggregate demand and accelerate the economy. To lower interest rates and accelerate the​ economy, the Bank of Canada buys​ bonds, increasing chartered bank reserves.
​- In an inflationary​ gap, the Bank of Canada raises interest rates to decrease aggregate demand to slow down the economy. To raise interest rates and slow down​ economy, the Bank of Canada sells bonds to decrease chartered bank reserves.

Question 12

When the Bank of Canada sells bonds on the bond​ market, this

A.
increases chartered bank reserves.
B.
increases chartered bank loans to the public.
C.
lowers interest rates.
D.
decreases chartered bank reserves.

Answer 12

D.

​- In a recessionary​ gap, the Bank of Canada lowers interest rates to increase aggregate demand and accelerate the economy. To lower interest rates and accelerate the​ economy, the Bank of Canada buys​ bonds, increasing chartered bank reserves.
​- In an inflationary​ gap, the Bank of Canada raises interest rates to decrease aggregate demand to slow down the economy. To raise interest rates and slow down​ economy, the Bank of Canada sells bonds to decrease chartered bank reserves.

Question 13

Which statement describes the impact of decreasing the money​ supply?

A.
Buying bonds raises interest​ rates, increasing aggregate demand​ (C + I​ + G​ + X​ - IM).
B.
Buying bonds lowers interest​ rates, increasing aggregate demand​ (C + I​ + G​ + X​ - IM).
C.
Selling bonds raises interest​ rates, decreasing aggregate demand​ (C + I​ + G​ + X​ - IM).
D.
Selling bonds lowers interest​ rates, decreasing aggregate demand​ (C + I​ + G​ + X​ - IM).

Answer 13

C.

The Bank of Canada uses open market operations to change the money supply by buying or selling bonds. When the Bank of Canada sells ​bonds, it decreases the money supply. The increase in the supply of bonds causes the price of bonds to fall. Bond prices and interest rates are inversely related. A fall in the price of bonds raises interest​ rates, decreasing aggregate demand.

Question 14

Which statement describes the impact of increasing the money​ supply?

A.
Selling bonds lowers interest​ rates, decreasing aggregate demand​ (C + I​ + G​ + X​ - IM).
B.
Buying bonds lowers interest​ rates, increasing aggregate demand​ (C + I​ + G​ + X​ - IM).
C.
Selling bonds raises interest​ rates, decreasing aggregate demand​ (C + I​ + G​ + X​ - IM).
D.
Buying bonds raises interest​ rates, increasing aggregate demand​ (C + I​ + G​ + X​ - IM).

Answer 14

B.

The Bank of Canada uses open market operations to change the money supply by buying or selling bonds. When the Bank of Canada buys ​bonds, it increases the money supply. The increase in the demand for bonds causes the price of bonds to rise. Bond prices and interest rates are inversely related. A rise in the price of bonds lowers interest​ rates, increasing aggregate demand.

Question 15

The Bank of Canada should increase interest rates today​ if, in​ 18-24 months,

A.
real GDP is predicted to be below potential GDP.
B.
it expects a recessionary gap.
C.
real GDP is predicted to be above potential GDP.
D.
the unemployment rate is predicted to be above the natural rate.

Answer 15

C.

The Bank of Canada should increase interest rates for an economy that is predicted to be in an inflationary gap​ 18-24 months from now. In an inflationary ​gap, real GDP is above potential GDP.

Question 16

The Bank of Canada should decrease interest rates today​ if, in​ 18-24 months,

A.
real GDP is predicted to be above potential GDP.
B.
the unemployment rate is predicted to be above the natural rate.
C.
the unemployment rate is predicted to be below the natural rate.
D.
it expects an inflationary gap.

Answer 16

B.

The Bank of Canada should decrease interest rates for an economy that is predicted to be in a recessionary gap​ 18-24 months from now. In a recessionary ​gap, the unemployment rate is above the natural rate.

Question 17

A decrease in the money supply will

A.
raise interest rates and cause the exchange rate to appreciate.
B.
lower interest rates and cause the exchange rate to depreciate.
C.
raise interest rates and cause the exchange rate to depreciate.
D.
lower interest rates and cause the exchange rate to appreciate.

Answer 17

A.
A decrease in the money supply will raise interest rates​ (the price of​ money) and cause the exchange rate to appreciate.

Question 18

An increase in the money supply will

A.
raise interest rates and cause the exchange rate to depreciate.
B.
lower interest rates and cause the exchange rate to depreciate.
C.
raise interest rates and cause the exchange rate to appreciate.
D.
lower interest rates and cause the exchange rate to appreciate.

Answer 18

B.
An increase in the money supply will lower interest rates​ (the price of​ money) and cause the exchange rate to depreciate.

Question 19

Monetary policy used to correct an inflationary gap causes the Canadian interest rate differential to

A.
increase​, leading to an appreciation of the Canadian​ dollar, increasing net​ exports, and​ off-setting the domestic transmission mechanism.
B.
decrease​, leading to a depreciation of the Canadian​ dollar, increasing net​ exports, and reinforcing the domestic transmission mechanism.
C.
increase​, leading to a depreciation of the Canadian​ dollar, increasing net​ exports, and​ off-setting the domestic transmission mechanism.
D.
increase​, leading to an appreciation of the Canadian​ dollar, decreasing net​ exports, and reinforcing the domestic transmission mechanism.

Answer 19

D.

If there is an appreciation of the Canadian​ dollar, exports ​(X​) are more expensive for the R.O.W and net exports decrease.

Question 20

Monetary policy used to correct a recessionary gap causes the Canadian interest rate differential to

A.
increase​, leading to an appreciation of the Canadian​ dollar, decreasing net​ exports, and reinforcing the domestic transmission mechanism.
B.
decrease​, leading to a depreciation of the Canadian​ dollar, increasing net​ exports, and reinforcing the domestic transmission mechanism.
C.
decrease​, leading to an appreciation of the Canadian​ dollar, decreasing net​ exports, and​ off-setting the domestic transmission mechanism.
D.
decrease​, leading to a depreciation of the Canadian​ dollar, decreasing net​ exports, and​ off-setting the domestic transmission mechanism.

Answer 20

B.

Monetary policy used to correct a recessionary gap with lower interest rates causes the Canadian interest rate differential to decrease. This policy leads to a depreciation of the Canadian​ dollar; therefore, exports ​(X​) are less expensive for the R.O.W and net exports increase. This increases aggregate demand and reinforces the domestic transmission mechanism.  

Question 21

The timing of the monetary ​”gas​” is crucial. If the central bank waits too long to step on the gas​, it risks
Part 2
A.
inflation.
B.
increasing aggregate demand.
C.
a stagnating economy.
D.
decreasing consumer confidence.

Answer 21

A.

The timing of the monetary ​”gas​” is crucial. If the central bank steps on the gas too soon​, it risks inflation. If it waits too long​, it risks inflation.

Question 22

The timing of the monetary ​”brake​” is crucial. If the central bank steps on the brake too soon​, it risks

A.
decreasing consumer confidence.
B.
halting recovery from a recession.
C.
lower interest rates.
D.
increased investment.

Answer 22

B.

The timing of the monetary ​”brake​” is crucial. If the central bank steps on the brake too soon​, it risks halting recovery from a recession. If it waits too long​, it risks stagnating the economy.

Question 23

A balance sheet recession

A.
causes transmission problems for monetary policy because players resist​ borrowing, spending, and lending. They opt instead for the security of money and savings.
B.
is caused by the collapse of asset​ prices, requiring that more borrowing occur to increase asset values.
C.
makes it harder to steer the economy towards recovery because more borrowing​ occurs, making it difficult to control the money supply.
D.
makes monetary transmission faster with monetary policy because players are eager to​ borrow, which stimulates the economy.

Answer 23

D.

The recession of​ 2008-2009 is also referred to as a balance sheet recessionlong dasha contraction caused by the collapse of asset prices. A balance sheet shows assets on one side​ (what you own or​ earn) and debts or liabilities on the other side​ (what you owe or​ spend). When the value of the assets you own​ falls, you need to cut back on what you spend or owe to restore balance. When the players resist​ borrowing, spending, and​ lending, and opt instead for the security of money and​ savings, monetary policy becomes even more challenging. Balance sheet recessions cause transmission problems for monetary​ policy, making it harder to steer the economy toward recovery. Facing falling asset values on their balance​ sheets, consumers,​ businesses, and banks make individually smart choices to resist​ borrowing, spending, and lending. But those individual smart choices do not add up to smart choices for the economy as a whole.

Question 24

During the Global Financial Crisis​ (2008-2009), to counteract transmission​ breakdowns, central banks used

A.
quantitative easing.
B.
open market operations to buy bonds.
C.
qualitative easing.
D.
international borrowing.

Answer 24

A.

To counteract transmission​ breakdowns, central banks used quantitative easing long dashflooding the financial system with money by buying risky​ bonds,
​mortgages, and assets from banks. These liabilities on bank balance sheets were replaced with cash​ assets, enabling banks to make new loans.

Question 25

During the Global Financial​ Crisis, to counteract transmission​ breakdowns, the Bank of Canada

A.
sold high minus risk bonds to chartered banks.
B.
bought shares of publicly traded companies.
C.
sold mortgages to foreign investors.
D.
bought mortgages from chartered banks.

Answer 25

D.

To counteract transmission​ breakdowns, the Bank of Canada used quantitative easing flooding the financial system with money by buying risky​ bonds, mortgages, and assets from banks. These liabilities on bank balance sheets were replaced with cash​ assets, enabling banks to make new loans.

Question 26

The timing of the monetary ​”brake​” is crucial. If the central bank waits too long to step on the brake​, it risks

A.
decreasing aggregate demand.
B.
decreasing consumer confidence.
C.
a stagnating economy.
D.
inflation.

Answer 26

D.

Question 27

A balance sheet recession

A.
makes monetary transmission faster with monetary policy because players are eager to​ borrow, which stimulates the economy.
B.
is caused by the rise of asset​ prices, requiring that more borrowing occur to increase asset values.
C.
causes transmission problems for monetary policy because players resist​ borrowing, spending, and lending. They opt instead for the security of money and savings.
D.
makes it easier to steer the economy towards recovery because more borrowing​ occurs, making it difficult to control the money supply.

Answer 27

C.

Question 28

Which of the following statements is true for only the ​”No, markets fail to quickly self adjust​” ​camp?

A.
Hands-off rules for monetary policy are favoured.
B.
Hands-on government discretion for monetary policy is favoured.
C.
Fixed rules should leave no discretion for monetary policy.
D.
Inflation-control targets are useful for central banks.

Answer 28

B.

Question 29

Which of the following statements is true for only the ​”No, markets fail to quickly self minus adjust​” ​camp?

A.
Fixed rules should leave no discretion for monetary policy.
B.
Market failure is more likely than government failure.
C.
Inflation minus control targets are useful for central banks.
D.
Government failure is more likely than market failure.

Answer 29

b.

Question 30

Which of the following statements is true for only the ​”Yes, markets quickly self-adjust​” ​camp?

A.
Market failure is more likely than government failure.
B.
Democratically elected politicians should set policy.
C.
Fixed rules should leave no discretion for monetary policy.
D.
Markets need a government minus like central bank to function properly.

Answer 30

C.

​”Yes” and​ “No” camps agree that markets need a​ government-like central bank to function properly. They agree that banks around the world are regulated because of a​ trade-off between profits and prudence. There are disagreements between the two camps on monetary policy.
The​ “Yes” camp favours​ hands-off rules for monetary policy. This camp likes targets that leave no discretion for central bankers and no opportunity for politicians to influence monetary policy. The​ “Yes” camp believes government failure is more likely than market failure.

Both the​ “Yes” and​ “No” camps largely agree that​ inflation-control targets are an effective compromise between the​ hands-off emphasis on rules and the​ hands-on emphasis on government discretion.

Question 31

Which of the following statements is true regarding​ Canada’s monetary​ policy?
A.
There is an inflation minus control target soley decided by government.
B.
There is a central bank with little independence comma ultimately responsible to Parliament.
C.
There is a central bank with considerable independence that is ultimately responsible to Parliament.
D.
There is a central bank that achieves its target jointly with the help of government.

Answer 31

C.

The government and the Bank of Canada jointly set the​ inflation-control target, while the largely independent Bank of Canada alone conducts the monetary policy for achieving that target. With an​ inflation-control target, the Bank of Canada automatically takes policy action to counter an inflationary boom​ (by raising interest rates to step on the​ brakes) or a recessionary bust​ (by lowering interest rates to step on the​ accelerator).

Question 32

​Inflation-rate targeting by an independent central bank

A.
feeds deflation expectations.
B.
feeds inflation expectations.
C.
favours a hands minus on emphasis on government discretion.
D.
helps price signals work.

Answer 32

D.

Inflation-rate targeting by an independent central bank anchors inflation​ expectations, helps price signals​ work, and combines a​ hands-off emphasis on rules and a​ hands-on emphasis on government discretion.

Question 33

​Inflation-rate targeting by an independent central bank

A.
combines a hands minus off emphasis on rules and a hands minus on emphasis on government discretion.
B.
feeds deflation expectations.
C.
results in confusing price signals.
D.
feeds inflation expectations.

Answer 33

A.

Question 34

Which of the following statements is true about the Bank of​ Canada?

A.
It has kept inflation nearly zero.
B.
It has steered the economy toward constant living standards.
C.
It has kept inflation within the target range.
D.
It has steered the economy toward zero unemployment.

Answer 34

C.

The Bank of Canada has focused only on​ inflation-rate targeting since 1991. The Bank has kept inflation within target range and steered the economy toward rising living standards and full employment.

Question 35

The​ “No” camp favours

A.
a role for government in setting and conducting monetary policy.
B.
hands-off rules for monetary policy.
C.
fixed rules that leave no discretion for monetary policy.
D.
none of the above.

Answer 35

A.

The ​”Nodashmarkets fail​ often” followers of Keynes favour a​ hands-on role for government. They believe that market failure is more likely than government failure. They are more willing to give government the discretion to set and conduct monetary policy to counter internally generated business cycles.