Question 1

Which of the following is the most important function of the Bank of Canada?

Accepted Answer

A)   the collection or clearing of cheques among chartered banks
B)   regulating the supply of money
C)   acting as a fiscal agent for the federal government
D)   holding the reserves of chartered banksE) B) and C)
F) None of the above

Question 2

A headline reads: " Bank of Canada raises the overnight rate by half a point." This indicates that:

Accepted Answer

A)   fiscal policy is being offset by monetary policy.
B)   monetary policy is being offset by fiscal policy.
C)   there has been a tightening of monetary policy.
D)   there has been an easing of monetary policy.E) None of the above
F) B) and D)

Question 3

It is assumed that households and businesses want to hold for transactions purposes an amount of money equal to one-half of the GDP. The table shows the amounts of money that households and businesses want to hold as an asset at various interest rates.
 
-When the market for money is in equilibrium:

Accepted Answer

A)   the quantity of money demanded equals the quantity of money supplied.
B)   the interest rate is neither increasing nor decreasing.
C)   bond prices are stable.
D)   all of the above hold true.E) A) and B)
F) A) and C)

Question 4

Which of the following statements is not correct?

Accepted Answer

A)   Given the supply of money, a decline in the demand for money will tend to reduce the equilibrium GDP.
B)   Given the supply of money, the equilibrium interest rate will vary directly with the level of money GDP.
C)   Given the demand for money, the equilibrium interest rate will vary inversely with the supply of money.
D)   Given the supply of money, the equilibrium interest rate will vary directly with the demand for money.E) A) and B)
F) B) and C)

Question 5

When a chartered bank borrows from the Bank of Canada:

Accepted Answer

A)   the supply of money automatically increases.
B)   it indicates that the chartered bank is unsound financially.
C)   the chartered bank's lending ability is increased.
D)   the chartered bank's reserves are reduced.E) B) and D)
F) A) and B)

Question 6

A newspaper headline reads: "Bank of Canada Raises the overnight rate for third time this year." This headline indicates that the Bank of Canada is most likely trying to:

Accepted Answer

A)   stimulate the economy.
B)   increase the money supply.
C)   reduce the cost of credit.
D)   reduce inflationary pressures in the economy.E) C) and D)
F) All of the above

Question 7

When a chartered bank borrows from the Bank of Canada:

Accepted Answer

A)   the supply of money automatically increases.
B)   it indicates that the chartered bank is unsound financially.
C)   the chartered bank's lending ability is increased.
D)   the chartered bank's reserves are reduced.E) All of the above
F) C) and D)

Question 8

Which of the following best describes the cause-effect chain of a restrictive monetary policy?

Accepted Answer

A)   A decrease in the money supply will lower the interest rate, increase investment spending, and increase GDP.
B)   A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease GDP.
C)   An increase in the money supply will raise the interest rate, decrease investment spending, and decrease GDP.
D)   An increase in the money supply will lower the interest rate, decrease investment spending, and increase GDP.E) A) and B)
F) B) and C)

Question 9

To reduce the overnight lending rate, the Bank of Canada can:

Accepted Answer

A)   buy government bonds from the chartered banks.
B)   increase the bank rate.
C)   increase the prime interest rate.
D)   sell government bonds to chartered banks.E) None of the above
F) A) and B)

Question 10

Which of the following best describes what occurs when monetary authorities sell government securities?

Accepted Answer

A)   There is a decrease in the size of chartered banks' excess reserves, the money supply increases, and interest rates fall, thereby causing a decrease in investment spending and real GDP.
B)   There is a decrease in the size of chartered banks' excess reserves, the money supply decreases, and the interest rates rise, thereby causing a decrease in investment spending and real GDP.
C)   There is a decrease in the size of chartered banks' excess reserves, the money supply decreases, and interest rates rise, thereby causing an increase in investment spending and real GDP.
D)   There is an increase in the size of chartered bank reserves, the money supply increases, and interest rates fall, thereby causing an increase in investment spending and real GDP.E) A) and B)
F) None of the above

Question 11

Assume that there is a 25 percent desired reserve ratio and that Bank of Canada buys $200 million worth of government securities. If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of:

Accepted Answer

A)   $600 million, and also by $600 million if the securities are purchased directly from chartered banks.
B)   $800 million, and also by $800 million if the securities are purchased directly from chartered banks.
C)   $600 million, but by $800 million if the securities are purchased directly from chartered banks.
D)   $800 million, but only by $600 million if the securities are purchased directly from chartered banks.E) B) and C)
F) A) and C)

Question 12

When the Bank of Canada buys bonds on the open market the reserves of chartered banks are:

Accepted Answer

A)   not affected.
B)   decreased by a multiple of the amount of the purchase.
C)   decreased by the amount of the purchase.
D)   increased initially by the amount of the purchase.E) A) and B)
F) C) and D)

Question 13

If there is an increase in nominal GDP, we would expect:

Accepted Answer

A)   the demand for money to increase.
B)   the interest rate to rise.
C)   bond prices to fall.
D)   all of the above to occur.E) B) and D)
F) None of the above

Question 14

The total demand for money will shift to the left as a result of:

Accepted Answer

A)   a decline in nominal GDP.
B)   an increase in the price level.
C)   a change in the interest rate.
D)   an increase in nominal GDP.E) B) and D)
F) All of the above

Question 15

A monetary policy-caused reduction in the overnight lending rate will:

Accepted Answer

A)   increase the prime interest rate.
B)   decrease the size of the monetary multiplier.
C)   increase the Bank of Canada rate.
D)   decrease the prime interest rate.E) A) and B)
F) A) and C)

Question 16

If the demand for money and the supply of money both decrease, we can conclude that at the equilibrium:

Accepted Answer

A)   interest rate will decline, but we cannot predict the change in the equilibrium quantity of money.
B)   quantity of money and the equilibrium interest rate will both increase.
C)   quantity of money will increase, but we cannot predict the change in the equilibrium interest rate.
D)   quantity of money will decline, but we cannot predict the change in the equilibrium interest rate.E) B) and D)
F) A) and D)

Question 17

-Refer to the above information. At equilibrium in the market for money, the total amount of money demanded is:

Accepted Answer

A)   $500.
B)   $480.
C)   $460.
D)   $440.E) None of the above
F) A) and D)

Question 18

-Refer to the above information. All else equal, the transaction demand for money in this table would increase if:

Accepted Answer

A)   nominal GDP increased.
B)   the interest rate fell.
C)   the supply of money increased.
D)   the supply of money decreased.E) B) and C)
F) All of the above

Question 19

The strengths of monetary policy compared to fiscal policy are generally thought to include all of the following except greater:

Accepted Answer

A)   speed.
B)   flexibility.
C)   impact on taxation.
D)   isolation from political pressure.E) A) and D)
F) None of the above

Question 20

Assume that the desired reserve ratio for the chartered banks is 25 percent. If Bank of Canada buys $3 billion in government securities from chartered banks we can say that, as a result of this transaction, the lending ability of the chartered banking system will:

Accepted Answer

A)   decrease by $9 billion.
B)   increase by $9 billion.
C)   increase by $15 billion.
D)   increase by $12 billion.E) A) and B)
F) All of the above

Exam 13: Interest Rates and Monetary Policy

The total demand for money will shift to the left as a result of:

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Assume that there is a 25 percent desired reserve ratio and that Bank of Canada buys $200 million worth of government securities. If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of:

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A monetary policy-caused reduction in the overnight lending rate will:

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The strengths of monetary policy compared to fiscal policy are generally thought to include all of the following except greater:

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To reduce the overnight lending rate, the Bank of Canada can:

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Which of the following is the most important function of the Bank of Canada?

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Which of the following best describes what occurs when monetary authorities sell government securities?

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-Refer to the above information. All else equal, the transaction demand for money in this table would increase if:

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If there is an increase in nominal GDP, we would expect:

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When a chartered bank borrows from the Bank of Canada:

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Which of the following best describes the cause-effect chain of a restrictive monetary policy?

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It is assumed that households and businesses want to hold for transactions purposes an amount of money equal to one-half of the GDP. The table shows the amounts of money that households and businesses want to hold as an asset at various interest rates. -When the market for money is in equilibrium:

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A newspaper headline reads: "Bank of Canada Raises the overnight rate for third time this year." This headline indicates that the Bank of Canada is most likely trying to:

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Assume that the desired reserve ratio for the chartered banks is 25 percent. If Bank of Canada buys $3 billion in government securities from chartered banks we can say that, as a result of this transaction, the lending ability of the chartered banking system will:

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-Refer to the above information. At equilibrium in the market for money, the total amount of money demanded is:

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If the demand for money and the supply of money both decrease, we can conclude that at the equilibrium:

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When a chartered bank borrows from the Bank of Canada:

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A headline reads: " Bank of Canada raises the overnight rate by half a point." This indicates that:

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Which of the following statements is not correct?

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When the Bank of Canada buys bonds on the open market the reserves of chartered banks are:

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