Lec17 iC Questions Flashcards
If a government controlled monetary policy and wanted to reduce unemployment heading into an election, how could they do that?
a) Reduce government spending
b) Reduce interest rates
c) Increase imports
d) Increase tax rates
e) None of the above
b) Reduce interest rates
“B is the only one is monetary policy, and the other options would only increase unemployment”
The interest rate rule-of-thumb is estimated as:
Overnight rate - Inflation = Neutral Rate + 0.5(Inflation - 2%) + Output Gap
If the inflation forecast is 4%, the neutral real rate is 1% and the output gap is +1%, what will the Bank of Canada set the overnight rate at?
Overnight Rate - 4% = 1% + 0.5(4% - 2%) + 1%
Overnight Rate - 4 = 1 + 0.5(2) + 1
Overnight Rate = 1 + 1 + 1 + 4
Overnight Rate = 7%
We start in long-run equilibrium. Assume that the Canadian economy is negatively impacted by US tariffs, causing the IS curve to shift left, and the Phillips curve to shift up. The Bank of Canada has a policy goal to maintain inflation at 2% and maintain full employment. How should they respond?
a) Lower interest rates
b) Do nothing
c) Raise interest rates
a) and c) are good (c is less likely)
b) is also reasonable
The Bank of Canada sets a deposit rate and a bank rate to support its target of the overnight rate. Which statement is correct?
a) The bank rate is lower than the deposit rate
b) The deposit rate is lower than the bank rate
c) The bank rate and the deposit rate are equal
d) None of the above
b) The deposit rate is lower than the bank rate
The bank rate is higher than the overnight rate which is higher than the deposit rate
*The bank tries to influence the overnight rate by setting the deposit rate just below it
The interest rate rule-of-thumb is estimated as:
Overnight rate - Inflation = Neutral Rate + 0.5(Inflation - 2%) + Output Gap
If the inflation forecast is 0%, the neutral real rate is 1% and the output gap is -3%, what will the Bank of Canada want to set the overnight rate at?
Overnight Rate - 0% = 1% + 0.5(0% - 2%) - 3%
Overnight Rate = 1 + 0.5(-2) - 3
Overnight Rate = -2 - 1
Overnight Rate = -3%
In March 2020, the Bank of Canada wanted to lower interest rates significantly. To do so, they lowered the overnight rate to 0.25%, and engaged in:
a) Quantitative easing, by selling longer-term bonds
b) Quantitative easing, by buying longer-term bonds
c) Quantitative tightening, by selling longer-term bonds
d) Quantitative tightening, by buying longer-term bonds
e) None of the above
b) Quantitative easing, by buying longer-term bonds
Quantitative Easing — a policy where the central bank buys longer-term bonds to inject liquidity into the financial system and lower long-term interest rates.
This helps encourage borrowing, investment, and spending to support economic recovery.
