Question : 11) Refer to Figure 29-1. If the Bank of Canada’s : 1384466

11) Refer to Figure 29-1. If the Bank of Canada’s goal is to increase the target interest rate to 3%, then the most effective approach is to

A) reduce the money supply to , as shown in part (ii), and then let the interest rate adjust to 3%.

B) increase the money supply to , as shown in part (ii), and then let the interest rate adjust to 3%.

C) allow the money supply to shift to by market forces, which will cause the interest rate to rise to 3%.

D) raise the interest rate to 3%, as shown in part (i), and then buy government securities in financial markets to accommodate the decline in the quantity of money demanded.

E) raise the interest rate to 3%, as shown in part (i), and then sell government securities in financial markets to accommodate the decline in the quantity of money demanded.

12) Refer to Figure 29-1. The Bank of Canada must be able to easily communicate its monetary policy actions to the public. Which approach is more amenable to this requirement, and why?

A) part (ii) – targeting the money supply: because an announcement of a 1% decrease in the money supply is more easily understood than an increase in the interest rate.

B) part (i) – targeting the interest rate: because the Bank of Canada can more easily instruct the commercial banks to raise their interest rates.

C) part (ii) – targeting the money supply: because the public can more easily understand that a decrease in reserves in the banking system makes it more difficult to get a loan or mortgage.

D) part (i) – targeting the interest rate: because changes in the interest rate are much more meaningful and understandable to the public than changes in the money supply.

13) Refer to Figure 29-1. One advantage of implementing monetary policy by targeting the interest rate as shown in part (i), rather than targeting the money supply as shown in part (ii), is that

A) it is easier to get political support for changes in interest rates than for changes in the money supply.

B) it is almost impossible to change the money supply without passing new legislation.

C) the overall change in interest rates, and thus on aggregate demand, is more certain.

D) changes in interest rates have a stronger impact on aggregate demand than do changes in the money supply.

E) the position and slope of the money demand curve are known with certainty.

14) In practise, the Bank of Canada uses monetary policy to reduce undesirable fluctuations in real GDP by

A) controlling business investment expenditures directly.

B) controlling government spending.

C) influencing market interest rates through changes in its target for the overnight interest rate.

D) directly influencing the money supply which affects the interest rate and hence, consumption and investment.

E) targeting the money supply directly.

15) What is the “bank rate”?

A) The interest rate at which the Bank of Canada will lend funds to the Canadian government.

B) The interest rate at which the Bank of Canada will lend funds to commercial banks.

C) The interest rate that commercial banks charge their best customers.

D) The interest rate that the Bank of Canada pays on deposits from the commercial banks.

E) It is the same as a margin requirement.

16) Loans from the Bank of Canada are

A) made only to the Canadian federal government and to provincial governments.

B) made to commercial banks at the bank rate.

C) made to commercial banks at the prime rate and are short-term in nature.

D) made to large non-bank corporations.

E) the Bank’s major policy instrument.

17) To reduce short-term market interest rates, the Bank of Canada could

A) reduce its target for the overnight rate.

B) decrease the commercial banks’ reserves.

C) decrease the money supply directly.

D) adjust the rate paid on Treasury bills.

E) reduce the commercial banks’ reserve requirements.

18) The Bank of Canada determines the “bank rate” by setting it equal to the upper end of a 50 basis-point-range that the

A) Government of Canada pays for short term loans to meet interest payments on the public debt.

B) Bank of Canada announces as a target range for the overnight interest rate.

C) Bank of Canada announces as a target range for the exchange rate between the Canadian Dollar and the US Dollar.

D) Bank of Canada announces as the target range for the five-year mortgage rate.

E) Bank of Canada announces as its target for the core rate of inflation.

19) To raise short-term market interest rates, the Bank of Canada could

A) purchase government securities in the open market.

B) increase its target for the overnight rate.

C) increase the commercial banks’ required reserves.

D) adjust the rate paid on Treasury bills.

E) lower the reserve requirement.

20) In practice, the Bank of Canada implements its monetary policy by

A) directly influencing the overnight interest rate.

B) directly influencing the excess reserves in the commercial banking system.

C) setting the money supply.

D) directly influencing the price level.

E) influencing the slope of the money demand curve.