Lec18 iC Questions Flashcards
If the Bank of Canada indicates that global growth will be slower than expected, all else equal, they are most likely to:
a) Lower interest rates
b) Raise interest rates
c) Lower tax rates
d) Raise tax rates
e) None of the above
a) Lower interest rates
The Bank of Canada announces that restricted supply chains are causing higher prices for imported goods, and also that Canadian investment is decreasing. In an IS-MP-PC model, this is represented as:
a) PC shifts down, IS shifts right
b) PC shifts up, IS shifts right
c) PC shifts up, IS shifts left
d) MP shifts up, IS shifts left
e) None of the above
c) PC shifts up, IS shifts left
Starting in long-run equilibrium, which of the following possible economic changes is most likely to lead to the Bank of Canada raising interest rates?
a) An increase in Canadian productivity
b) An appreciation of the Canadian dollar
c) A rise in Canadian tax rates
d) An increase in government spending
e) None of the above
d) An increase in government spending
The policy rule-of-thumb (or Taylor rule) is:
Overnight Rate - Inflation = Neutral Rate + 0.5(Inflation - 2%) + Output Gap
As of today (March 12th 2025), the Bank of Canada estimates that the real neutral rate is 0.75%, inflation and expected inflation are 2%, and the output gap is -0.75%. What would the Taylor rule identify as the overnight rate?
Overnight Rate - 2% = 0.75% + 0.5(2%-2%) - 0.75%
Overnight Rate = 2%
Which of the following potential current risks would cause the Bank of Canada to set an interest rate higher than the Taylor Rule suggests? (Might be more than one right answer)
a) A depreciation of the Canadian dollar
b) An appreciation of the Canadian dollar
c) An increase in input costs for businesses
d) A decrease in incomes in the United States
e) A decrease in investment spending in Canada
a) A depreciation of the Canadian dollar
- Phillips curve shifts up, IS curve shifts right, both cause higher inflation
c) An increase in input costs for businesses
- Increase in input costs, Phillips curve shifts up, higher inflation
If the US economy shows signs of recession and stagflation (GDP falling, unemployment rising, inflation rising) - how would the Bank of Canada respond to that? (More than one right answer)
a) Lower interest rates
b) Do nothing
c) Raise interest rates
a) Lower interest rates
If the US goes into a recession, nothing else changes, that would reduce demand for Canadian exports, the Bank of Canada would lower interest rates in anticipation of a possible recession
c) Raise interest rates
If they raise interest rates in the US, that tends to get dollars flowing from Canada to the US, the difference between Canada and US interest rates rises, and the Canadian dollar depreciates, leading to Canada to raise interest rates.
b) Do nothing
Also if things to bad in the US, a recession in the US can make tariffs go away, and we go away quickly, which the Bank of Canada might raise interest rates
The policy rule-of-thumb (or Taylor rule) is:
Overnight Rate - Inflation = Neutral Rate + 0.5(Inflation - 2%) + Output Gap
In March 2020, the real neutral rate is estimated at 1%, measured inflation was 0%, and the output gap was (maybe) -6%. What would the Taylor rule have identified as the overnight rate?
Overnight Rate - 0% = 1% + 0.5(0% - 2%) - 6%
Overnight Rate = -1 - 5
Overnight Rate = -6%
The policy rule-of-thumb (or Taylor rule) is:
Overnight Rate - Inflation = Neutral Rate + 0.5(Inflation - 2%) + Output Gap
In March 2022, the real neutral rate is estimated at 1%, measured inflation was 5%, and the output gap was (maybe) +1%. What would the Taylor rule have identified as the overnight rate?
Overnight Rate - 5% = 1% + 0.5(5% - 2%) + 1%
Overnight Rate = 1.5 + 7
Overnight Rate = 8.5%
