Question 1

A liquidity trap refers to a situation in which:

Accepted Answer

A)   taking away liquidity from the banks has a major positive effect on lending.
B)   adding liquidity to banks has major positive effects on lending.
C)   adding liquidity to banks has little or no positive effects on lending.
D)   taking away liquidity to banks has a major negative effect on lending.E) A) and B)
F) None of the above

Question 2

-Refer to the above diagram for the market for money. If each dollar held for transactions purposes is spent four times per year on the average, we can infer that the:

Accepted Answer

A)   real GDP is $800.
B)   nominal GDP is $800.
C)   money supply must be $800.
D)   nominal GDP is $1,200.E) B) and D)
F) None of the above

Question 3

In the consolidated balance sheet of the Bank of Canada, loans to chartered banks are:

Accepted Answer

A)   a liability of the Bank of Canada and chartered banks.
B)   an asset of the Bank of Canada and chartered banks.
C)   a liability of the Bank of Canada and an asset for chartered banks.
D)   an asset of the Bank of Canada and a liability for chartered banks.E) B) and C)
F) A) and D)

Question 4

If nominal GDP is $2,000 billion and the amount of money demanded for transactions purposes is $500 billion, then on average each dollar will be spent about four times.

Accepted Answer

A) True 
 B)False

Question 5

A headline reads: " Bank of Canada cut the overnight lending rate by half a point." This suggests that:

Accepted Answer

A)   the prime interest rate will rise.
B)   the velocity of money will fall.
C)   monetary policy has eased.
D)   the bank rate will rise.E) None of the above
F) A) and D)

Question 6

Other things equal, an expansionary monetary policy will:

Accepted Answer

A)   reduce net exports.
B)   increase interest rates.
C)   reduce GDP.
D)   reduce the international value of the dollar.E) B) and D)
F) B) and C)

Question 7

The asset demand for money is most closely related to money functioning as a:

Accepted Answer

A)   unit of account.
B)   medium of exchange.
C)   store of value.
D)   measure of value.E) B) and C)
F) None of the above

Question 8

-The price of a bond with no expiration date is originally $5,000 and it pays an annual interest payment of $500. If the price of the bond falls to $3,000, then the effective interest rate yield to a new buyer of the bond is:

Accepted Answer

A)   14.4 percent.
B)   16.6 percent.
C)   11.0 percent.
D)   9.0 percent.E) B) and C)
F) All of the above

Question 9

If the demand for money increases and the monetary authorities want interest rates to remain unchanged, which of the following would be appropriate policy?

Accepted Answer

A)   recall currency from circulation
B)   raise the desired reserves
C)   buy bonds in the open market
D)   raise the bank rateE) A) and B)
F) A) and D)

Question 10

The overnight lending rate is:

Accepted Answer

A)   higher than the prime interest rate.
B)   lower than the prime interest rate.
C)   always equal to the Bank of Canada rate.
D)   equal to the prime interest rate minus the Bank of Canada bank rate.E) B) and C)
F) All of the above

Question 11

The Bank of Canada often communicates its intentions to tighten or loosen monetary policy by announcing a change in targets for:

Accepted Answer

A)   exchange rate.
B)   overnight lending rate.
C)   prime interest rate.
D)   the velocity of money.E) B) and D)
F) None of the above

Question 12

Under some conditions, proper domestic monetary policy may be at odds with the goal of correcting a trade imbalance because:

Accepted Answer

A)   changes in the domestic interest rate cause changes in domestic investment spending.
B)   changes in the domestic interest rate tend to cause changes in the international value of the dollar.
C)   the domestic interest rate varies inversely with the value of the dollar.
D)   changes in the interest rate cause changes in domestic saving.E) A) and C)
F) A) and D)

Question 13

There is an asset demand for money because households and business firms use money as a store of value.

Accepted Answer

A) True 
 B)False

Question 14

On a diagram wherein the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the asset demand for money can be represented by:

Accepted Answer

A)   a line parallel to the horizontal axis.
B)   a vertical line.
C)   a downward sloping line or curve from left to right.
D)   an upward sloping line or curve from left to right.E) B) and C)
F) B) and D)

Question 15

Which line in the above graph would best reflect the slope of the asset demand for money curve?

Accepted Answer

A)   line 1
B)   line 2
C)   line 3
D)   line 4E) None of the above
F) All of the above

Question 16

The Special Purchase and Resale Agreement (SPRA) , is a transaction in which:

Accepted Answer

A)   the Bank of Canada, offers to sell government securities with an agreement to buy them back at a predetermined price the next business day.
B)   the Bank of Canada, offers to buy government securities with an agreement to sell them back at a predetermined price the next business day.
C)   the Bank of Canada, offers to buy government securities with an agreement to sell them back at a predetermined price the next month.
D)   the Bank of Canada, offers to sell government securities with an agreement to buy them back at a predetermined price the next month.E) B) and D)
F) B) and C)

Question 17

If during a certain period the Bank of Canada's policy target was to stabilize the money supply, we would expect:

Accepted Answer

A)   less inflation than if the Bank of Canada's policy was to stabilize interest rates.
B)   tax revenues to fall.
C)   interest rates to be quite volatile.
D)   interest rates to be unusually stable.E) None of the above
F) B) and C)

Question 18

Notes in circulation are:

Accepted Answer

A)   an asset as viewed by the Bank of Canada.
B)   a liability as viewed by the Bank of Canada.
C)   neither an asset nor a liability as viewed by the Bank of Canada.
D)   part of M1, but not of M2 or M2+.E) A) and D)
F) B) and D)

Question 19

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

Accepted Answer

A)   buy government bonds from the public.
B)   decrease the bank rate.
C)   decrease the prime interest rate.
D)   sell government bonds to chartered banks.E) A) and B)
F) A) and C)

Question 20

The interest rate will fall when the:

Accepted Answer

A)   quantity of money demanded exceeds the quantity of money supplied.
B)   quantity of money supplied exceeds the quantity of money demanded.
C)   demand for money increases.
D)   supply of money decreases.E) All of the above
F) B) and C)

Exam 13: Interest Rates and Monetary Policy

The interest rate will fall when the:

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The Bank of Canada often communicates its intentions to tighten or loosen monetary policy by announcing a change in targets for:

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-The price of a bond with no expiration date is originally $5,000 and it pays an annual interest payment of $500. If the price of the bond falls to $3,000, then the effective interest rate yield to a new buyer of the bond is:

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On a diagram wherein the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the asset demand for money can be represented by:

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The asset demand for money is most closely related to money functioning as a:

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In the consolidated balance sheet of the Bank of Canada, loans to chartered banks are:

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If during a certain period the Bank of Canada's policy target was to stabilize the money supply, we would expect:

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Under some conditions, proper domestic monetary policy may be at odds with the goal of correcting a trade imbalance because:

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If the demand for money increases and the monetary authorities want interest rates to remain unchanged, which of the following would be appropriate policy?

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The overnight lending rate is:

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A headline reads: " Bank of Canada cut the overnight lending rate by half a point." This suggests that:

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A liquidity trap refers to a situation in which:

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

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If nominal GDP is $2,000 billion and the amount of money demanded for transactions purposes is $500 billion, then on average each dollar will be spent about four times.

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Notes in circulation are:

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Other things equal, an expansionary monetary policy will:

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-Refer to the above diagram for the market for money. If each dollar held for transactions purposes is spent four times per year on the average, we can infer that the:

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Which line in the above graph would best reflect the slope of the asset demand for money curve?

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The Special Purchase and Resale Agreement (SPRA) , is a transaction in which:

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There is an asset demand for money because households and business firms use money as a store of value.

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