Question : 1) Any central bank, including the Bank of Canada, can : 1384465

1) Any central bank, including the Bank of Canada, can implement its monetary policy by directly influencing either ________ or ________, but not both.

A) money supply; money demand

B) aggregate supply; aggregate demand

C) the money supply; the interest rate

D) aggregate demand; the interest rate

E) the price level; the interest rate

2) Consider the implementation of monetary policy. One difficulty in attempting to stabilize the economy by controlling the money supply is that

A) firms may be sensitive to changes in the rate of interest.

B) the Bank of Canada can print more money.

C) the commercial banks may choose not to hold excess reserves.

D) the money demand function may be unstable.

E) the Canadian government requires long-term loans.

3) If the Bank of Canada chooses to expand M2 by exactly $1 million, it could do so by

A) buying $1 million worth of government securities on the open market.

B) selling $1 million worth of government securities on the open market.

C) increasing reserves at the commercial banks by $1 million.

D) decreasing reserves at the commercial banks by $1 million.

E) None of the above – the Bank of Canada cannot precisely control the money supply.

4) In practice, it is not possible for the Bank of Canada to control the money supply because

A) the resulting effects on the value of the Canadian dollar are difficult to predict.

B) it cannot control the process of deposit creation carried out by the commercial banks.

C) it cannot control the amount of cash reserves that are injected into or withdrawn from the banking system.

D) it does not have the legal power to do so.

E) None of the above—the Bank of Canada could control the money supply if it chose to do so.

5) Suppose the Bank of Canada were to implement an expansionary monetary policy by buying government securities on the open market, thereby increasing cash reserves in the banking system. If the commercial banks do not expand their lending in response, then

1) there would be no change in the money supply at all;

2) the Bank of Canada could force the commercial banks to expand their lending, based on regulations in the Bank Act;

3) the increase in the overall money supply would be smaller than the Bank of Canada may have intended.

A) 1 only

B) 2 only

C) 3 only

D) 1 or 2

E) 2 or 3

6) One reason that the Bank of Canada does not try to influence the money supply directly is that

A) the Bank of Canada has many other policy tools with which it can influence aggregate demand.

B) the Bank of Canada does not have the mandate to change the money supply.

C) because the money demand curve is almost horizontal, changes in the money supply would have little or no effect on the interest rate.

D) because the investment demand curve is almost vertical, any change in the interest rate resulting from a change in money supply would have little or no effect on desired investment expenditure.

E) the slope of the money demand curve is not precisely known, and so the effect on the interest rate of a change in money supply is uncertain.

7) Most central banks, including the Bank of Canada, implement monetary policy by

A) controlling the money supply directly.

B) influencing a short-term interest rate directly.

C) influencing investment demand directly.

D) influencing the demand for money directly.

E) controlling the process of deposit creation in the commercial banking system.

8) The Bank of Canada chooses to influence interest rates directly rather than influencing the money supply directly because

A) the former method does not require knowledge of the position of the money demand curve.

B) the deposit creation mechanism in the banking system is outside the full control of the Bank of Canada.

C) it is easier to communicate policy actions to the public by setting the interest rate.

D) the former method does not require knowledge of the slope of the money demand curve.

E) all of the above.

9) Refer to Figure 29-1. If the Bank of Canada raises the target interest rate to 3%, as shown in part (i), then it must accommodate the resulting ________ in quantity of money demanded by ________ in financial markets.

A) increase; selling government securities

B) decrease; selling government securities

C) increase; buying government securities

D) decrease; buying government securities

10) Refer to Figure 29-1. If the Bank of Canada pursues a(n) ________ monetary policy and raises the target interest rate to 3%, then the quantity of money demanded will ________.

A) contractionary; rise

B) contractionary; fall

C) expansionary; not change

D) expansionary; rise

E) expansionary; fall