Lecture 16 Flashcards
Suppose the Bank of Canada is criticized for implementing a contractionary monetary policy at a time when the inflation rate is at or near its target level. One explanation for this policy decision is likely that
A) the Bank anticipates a decrease in investment spending and is acting now because of the unavoidable time lags.
B) the Bank regularly maintains a contractionary policy stance in order to keep inflation at or near its target.
C) it is extremely difficult to predict future events and a contractionary policy is the safest policy choice.
D) the Bank anticipates a decrease in Canadian net exports and is acting now because of the unavoidable time lags.
E) the Bank anticipates a rise in inflation and is acting now because of the unavoidable time lags.
E) the Bank anticipates a rise in inflation and is acting now because of the unavoidable time lags.
Suppose the Bank of Canada lowers its target for the overnight interest rate and longer-term rates in the market fall as a result. Households’ and firms’ demand for new loans from the commercial banks would ________. In order to make the new loans, the commercial banks require more ________.
A) fall; currency B) remain stable; excess reserves C) rise; government securities D) rise; cash reserves E) fall; excess reserves
D) rise; cash reserves
In the short run the Bank of Canada aims to ________, in an effort to ________.
A) enhance any positive shocks; keep inflation within its target band
B) ignore any shocks as they are automatically adjusting; keep inflation within its target band
C) keep actual output within 1%-3% of potential output; keep the money supply growing at a constant rate
D) ignore any shocks as they are automatically adjusting; keep GDP growth constant
E) reduce any positive or negative output gaps; keep inflation close to the official target
E) reduce any positive or negative output gaps; keep inflation close to the official target
If the Bank of Canada chooses to expand the money supply directly, it could
A) buy government securities on the open market.
B) sell government securities on the open market.
C) sell some of its foreign currency assets.
D) change the price level.
E) reduce its deposits at commercial banks.
A) buy government securities on the open market.
The interest rate that the Bank of Canada charges commercial banks for loans is called the
A) prime rate. B) term interest rate. C) preferred lending rate. D) overnight interest rate. E) bank rate.
E) bank rate.
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 housing starts; shift the AD curve to the left to close the recessionary output gap
B) fall in net exports; shift the AD curve to the right to close the recessionary output gap
C) fall in net exports; shift the AS curve to close the inflationary output gap
D) fall in consumption; shift the AD curve to the right to close the inflationary output gap
E) fall in consumption; shift the AD curve to the left to close the recessionary output gap
B) fall in net exports; shift the AD curve to the right to close the recessionary output gap
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) the goal of long-term “price stability.”
B) the level of real income growth and “price stability.”
C) unemployment levels and the level of prices.
D) real GDP growth.
E) exchange rate targets since depreciation of the Canadian dollar tends to be inflationary.
D) real GDP growth.
As of 2015, the Bank of Canada’s policy objective is to maintain inflation at or near the target of
A) 0%. B) 1%. C) 2%. D) 3%. E) 4%.
C) 2%.
Given its existing policy regime of “inflation targeting,” the Bank of Canada would likely react to a large positive aggregate demand shock by
A) buying bonds from the open market.
B) decreasing its target for the overnight interest rate.
C) ignoring the shock and allowing the economy to adjust.
D) increasing its target for the overnight interest rate.
E) lowering the bank rate.
D) increasing its target for the overnight interest rate.
It might take a while before the effects of changes in monetary policy are realized in the economy because it takes a while for
A) the exchange rate to adjust.
B) the overnight interest rate and longer-term interest rates to adjust.
C) monetary policy to be implemented via open-market operations.
D) investment expenditures and net exports to adjust.
E) government purchases to adjust.
D) investment expenditures and net exports to adjust.
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) desired investment; inflation to increase
B) money supply; a drop in the overnight lending rate and increased investment
C) desired investment; the Bank of Canada to adopt a core inflation targeting policy
D) money demand; decreased inflation and a serious recession
E) money supply; the Bank of Canada to apologize to the public for its policy error
D) money demand; decreased inflation and a serious recession
Which of the following describes the cause of a sustained inflation?
A) the monetary transmission mechanism
B) simultaneous AD and AS shocks
C) an aggregate supply shock significant enough to cause a substantial rise in the price level
D) continual monetary expansion
E) an aggregate demand shock significant enough to cause a substantial rise in the price level
D) continual monetary expansion
Economists at the Bank of Canada estimate that time lags in monetary policy imply that
A) monetary policy is totally ineffective in changing overnight lending rates in the short run.
B) monetary policy can cause changes in core inflation to occur in 9-12 months and changes in the exchange rate to occur in 18-24 months.
C) monetary policy can cause changes in core inflation to occur in 9 to 12 months and changes in real GDP to occur in 18-24 months.
D) monetary policy is totally ineffective in changing core inflation rates in the long run.
E) monetary policy can cause changes in real GDP to occur in 9-12 months and changes in core inflation to occur in 18-24 months.
E) monetary policy can cause changes in real GDP to occur in 9-12 months and changes in core inflation to occur in 18-24 months.
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) There are automatic stabilizers inherent in monetary policy that allow the policy to adjust to close the output gap.
B) The Bank of Canada responds to the average level of inflation in the country and implements a single monetary policy.
C) The Bank of Canada consults with the commercial banks on the appropriate level of deposit creation for each region of the country.
D) The Bank of Canada implements monetary policy in each region of Canada as required.
E) Each regional office of the Bank of Canada implements the appropriate monetary policy for that region.
B) The Bank of Canada responds to the average level of inflation in the country and implements a single monetary policy.
In an effort to maintain inflation at its targeted level the Bank of Canada designs its policies, in the short run, to
A) minimize the growth of the money supply.
B) eliminate all unemployment.
C) allow the aggregate supply curve to close any output gaps.
D) eliminate all negative shocks to the economy.
E) keep real GDP close to potential output.
E) keep real GDP close to potential output.
