Chapter 28.4 Flashcards
In 1980, the annual inflation rate in Canada was A) over 12%. B) roughly 8%. C) roughly 6%. D) roughly 2%. E) roughly zero.
A
In the early 1980s, the Bank of Canada contracted the rate of growth of the money supply in an attempt to reduce inflation. One problem with this policy was that
A) an unexpected increase in the demand for money caused the policy to be more contractionary than necessary, leading to a recession.
B) an unexpected increase in the demand for money caused the policy to be more expansionary than necessary, leading to further inflation.
C) the demand for money dropped at the same time, causing the policy to be more contractionary than necessary, leading to an undesirable boom.
D) the demand for money dropped at the same time, causing the policy to be more expansionary than necessary, leading to further inflation.
E) it proved completely ineffective in influencing either real GDP or the price level.
A
During a period of renewed inflation fears in 1988, the governor of the Bank of Canada, Mr. John Crow, announced that monetary policy would henceforth be guided more by
A) exchange rate targets since depreciation of the Canadian dollar tends to be inflationary.
B) real GDP growth.
C) the goal of long-term “price stability.”
D) the level of real income growth and “price stability.”
E) unemployment levels and the level of prices.
C
During the period of economic recovery between 1983 and 1987, the main challenge for the Bank of Canada was to
A) accommodate the recovery, and the associated growth in money demand, without increasing the money supply so much as to refuel inflation.
B) decrease the money supply to dampen inflationary expectations.
C) increase the money supply so that only a mild form of inflation would reappear.
D) stabilize the exchange rate between the U.S. and Canadian dollars.
E) stabilize the unemployment rate.
A
The decision by the Bank of Canada and many other central banks to target the rate of inflation partly reflects the evidence of the
A) long-run neutrality of money.
B) link between the money supply and the exchange rate.
C) power of the overnight lending rate to affect long-run investment.
D) power of the overnight interest rate to affect consumer borrowing.
E) link between the output gap and the money supply.
A
In the early 1980s, when the Bank of Canada was focusing its attention on reducing the growth rate of the money supply, an unplanned surge in ________ led to an unintended tight monetary policy which caused ________.
A) money demand; decreased inflation and a serious recession
B) money supply; a drop in the overnight lending rate and increased investment
C) desired investment; inflation to increase
D) desired investment; the Bank of Canada to adopt a core inflation targeting policy
E) money supply; the Bank of Canada to apologize to the public for its policy error
A
In 1994, Gordon Thiessen was appointed as the new governor of the Bank of Canada. Governor Thiessen proceeded to
A) continue the tough and unpopular contractionary monetary policy of his predecessor.
B) continue the popular low overnight lending policy of his predecessor.
C) abandon the tough and unpopular contractionary monetary policy of his predecessor in favour of a policy designed to depreciate the Canadian dollar.
D) abandon the tough and unpopular contractionary monetary policy of his predecessor in favour of a low-interest-rate policy.
E) increase the overnight lending rate in order to stabilize the Canadian-U.S. exchange rate.
A
What is the policy response by the Bank of Canada to an inflationary gap in one region of Canada (e.g. the West) when at the same time a recessionary gap exists in another region of Canada (e.g. Ontario)?
A) Each regional office of the Bank of Canada implements the appropriate monetary policy for that region.
B) The Bank of Canada implements monetary policy in each region of Canada as required.
C) There are automatic stabilizers inherent in monetary policy that allow the policy to adjust to close the output gap.
D) The Bank of Canada consults with the commercial banks on the appropriate level of deposit creation for each region of the country.
E) The Bank of Canada responds to the average level of inflation in the country and implements a single monetary policy.
E
In 2007 and 2008, Canada was affected by the global financial crisis that had begun with the U.S. housing collapse. What actions did the Bank of Canada take between the fall of 2007 and the end of 2008 in an attempt to maintain the level of economic activity in Canada? The Bank of Canada
A) maintained its target for the overnight rate and made short-term loans to financial institutions more accessible.
B) implemented a large fiscal stimulus program to counteract the sharp rise in interest rates that had occurred.
C) reduced its target for the overnight rate by over 3.5 percentage points and made short-term loans to financial institutions more accessible.
D) reduced its target for the overnight rate by over 5 percentage points and purchased “toxic” assets from Canadian commercial banks.
E) purchased “toxic” assets from Canadian commercial banks and implemented a large fiscal stimulus program.
C
In 2007 and 2008, Canada was affected by the global financial crisis that had begun with the U.S. housing collapse. By the spring of 2009, the Bank of Canada had reached a practical minimum for its nominal policy interest rate of \_\_\_\_\_\_\_\_%. A) 0 B) 0.25 C) 0.50 D) 0.75 E) 1.00
B
In 2007 and 2008, Canada was affected by the global financial crisis that had begun with the U.S. housing collapse. By early 2009, the Canadian economy was in a recession with Y < Y*. What economic policies were implemented to close the output gap?
A) expansionary monetary policy
B) expansionary fiscal policy
C) contractionary monetary policy and contractionary fiscal policy
D) contractionary monetary policy and expansionary fiscal policy
E) expansionary monetary policy and expansionary fiscal policy
E
In 2007 and 2008, Canada was affected by the global financial crisis that had begun with the U.S. housing collapse. By 2009, the Canadian economy had entered a recession, largely due to a reduction in investment and a ________. The policy objective for the Bank of Canada and the government at this time was to ________.
A) fall in net exports; shift the AD curve to the right to close the recessionary output gap
B) fall in consumption; shift the AD curve to the right to close the inflationary output gap
C) fall in consumption; shift the AD curve to the left to close the recessionary output gap
D) fall in net exports; shift the AS curve to close the inflationary output gap
E) fall in housing starts; shift the AD curve to the left to close the recessionary output gap
A
During the financial crisis that began in 2008 the Bank of Canada took actions to increase the amount of reserves in the banking system. (They were “injecting liquidity.”) However, the money supply (M2+) did not increase as predictably as it would have at other times. Why not?
A) The banks formally increased their target reserve ratios to over 40% due to the increased risks in the Canadian economy.
B) The panic in the world’s financial sector led to a massive reduction in all types of lending from financial institutions.
C) The banks formally increased their target reserve ratios to 20% due to the increased risks in the Canadian economy.
D) The large and sudden increase in excess reserves at the commercial banks led to a significant increase in lending and a subsequent reduction in M2+.
E) The panic in the world’s financial sector led to a massive increase in all types of lending from financial institutions.
B
