Chapter 13

Question 1

Which of the following statements best describes the Bank of Canada? It is:

Answer 1

a publicly owned and publicly controlled central bank, whose basic goal is to control the money supply and interest rates in promoting the general economic welfare

Question 2

The bank rate is the interest rate at which:

Answer 2

the Bank of Canada lends to CPA members

Question 3

The interest rate at which the Bank of Canada lends to CPA members is called:

Answer 3

the bank rate

Question 4

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

Answer 4

demand curve rightward

Question 5

If the economy’s potential output is $550 billion, the monetary authorities should seek to:

Answer 5

establish the money supply at $80 billion

Question 6

If the economy’s potential output is $550 billion and the equilibrium interest rate is 7 percent:

Answer 6

there is a recessionary gap of $200 billion

Question 7

An increase in the money supply will tend to:

Answer 7

lower the interest rate and increase equilibrium real output

Question 8

When the Bank of Canada engages in a tight money policy, the price of bonds tends to:

Answer 8

fall

Question 9

When the Bank of Canada engages in an easy money policy, the interest rate received on bonds tends to:

Answer 9

fall

Question 10

The money supply (M), the interest rate (r), and aggregate demand (AD) are related such that a(n):

Answer 10

reduction in M increases r and the increase in r decreases AD

Question 11

Monetary policies that cause an increase in the money supply:

Answer 11

lower the interest rate, increase spending on investment and consumer durables, and shift aggregate demand rightward

Question 12

Which of the following statements best describes the cause-and-effect chain of an expansionary monetary policy?

Answer 12

An increase in the money supply will lower the interest rate, increase aggregate demand, and increase real output.

Question 13

Assume that the Bank of Canada’s policy is to keep the price level from either rising or falling. If aggregate supply decreases in the economy, the Bank of Canada:

Answer 13

will have to decrease the money supply if it wishes to keep the price level from rising

Question 14

Assume that the Bank of Canada’s policy is to stabilize the interest rate. If the economy begins to expand, the Bank of Canada:

Answer 14

would have to increase the money supply to keep the interest rate from rising

Question 15

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

Answer 15

decrease aggregate demand

Question 16

If the demand for money increases and the monetary authorities want interest rates to remain unchanged, which of the following would be the most appropriate policy?

Answer 16

buy bonds in the open market

Question 17

Which of the following is not a tool of monetary policy?

Answer 17

changes in tax rates

Question 18

If the Bank of Canada wants to reduce bank lending, it typically:

Answer 18

sells bonds in the open market

Question 19

The monetary authorities signal changes in monetary policy by:

Answer 19

changing the 50-basis-point range for the overnight rate

Question 20

Which of the following will tend to increase bank reserves?

Answer 20

the purchase of bonds in the open market by the Bank of Canada