Chapter 11 MCQ Flashcards
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.
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.
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.
A.
When there is price stability, inflation is low enough that it does not significantly affect people’s economic decisions.
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.
B.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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).
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.
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).
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.
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.
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.
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.
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.
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.
A.
A decrease in the money supply will raise interest rates (the price of money) and cause the exchange rate to appreciate.
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.
B.
An increase in the money supply will lower interest rates (the price of money) and cause the exchange rate to depreciate.
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.
D.
If there is an appreciation of the Canadian dollar, exports (X) are more expensive for the R.O.W and net exports decrease.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
D.
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.
C.
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.
B.
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.
b.
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.
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.
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.
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).
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.
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.
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.
A.
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.
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.
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.
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.
