Chapter 11 & 12 Practice and Quiz Me Questions

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Chapter 11 and 12 11.1 Practice and Quiz Me Questions Monetary policy refers to a. adjusting the supply of money and interest rates to achieve steady growth, full employment, and stable prices b. identifying international exchange rates that achieve maximum exports c. identifying international exchange rates that achieve steady growth, full employment, and stable prices d. changing the supply of money and interest rates to achieve net exports When there is price stability, a. the inflation rate is equal to the exchange rate b. the inflation rate is low enough that it does not significantly affect people’s economic decisions c. there is no inflation d. the inflation rate is equal to the growth rate of the core CPI An inflation-control target is a. achieved in cooperation with several leading central banks b. an operational guide c. a range of inflation rates set as a target by a central bank as a monetary policy objective d. based on a version of CPI that excludes products and services with the most volatile prices Since 1991, the government of Canada and the bank of Canada agreed a. to use monetary policy to keep the inflation rate between one percent and three percent b. to use monetary policy to keep the inflation rate at zero c. to meet GDP growth target as measured by average increases in the past ten years d. to use the monetary policy to keep the interest rate equal to the GDP growth rate

Since 1991, the government of Canada and the Bank of Canada agreed a. to meet a GDP growth target set by the government b. to meet an inflation – control target measured by the percentage change in the Consumer Price Index (CPI) c. to use monetary policy to keep the interest rate equal to the GDP growth rate d. to contain the annual rate of inflation between three percent and five percent 11.2 Practice and Quiz Me Questions When the economy is slowing down, the Bank of Canada a. steps on the brake by raising interest rates b. steps on the gas by lowering interest rates c. steps on the gas by raising interest rates d. steps on the brakes by lowering interest rates Since a change in interest rates takes a. 60 months to affect the economy, the bank of Canada relies on bankers’ economic predictions b. an unpredictable period to affect the economy, the Bank of Canada tries to keep monetary policy steady c. one to six months to affect the economy, the Bank of Canada must act quickly d. up to 24 months to affect the economy, the Bank of Canada hires economists to estimate what they think will happen to the economy The Bank of Canada uses open market operations to change interest rates. Selling bonds a. increases the money supply and lowers bond prices, raising interest rates b. decreases the money supply and lowers bond prices, lowering interest rates c. decreases the money supply and raises bond prices, raising interest rates d. decreases the money supply and lowers bond prices, raising interest rates

The Bank of Canada uses open market operations to change interest rates. Buying bonds a. decreases the money supply and raises bond prices, lowering interest rates b. increases the money supply and raises bond prices, raising interest rates c. increases the money supply and raises bond prices, lowering interest rates d. increases the money supply and lowers bond prices, lowering interest rates The central bank of Dinotopia has the same inflation-control target as the Bank of Canada. The CPI inflation rate in Dinotopia was 0.1 percent in September 2014 and 2.7 percent in November 2014. The CPI inflation rate was a. in the target range in September but not November b. in the target range in November but not September c. in the target range in both November and September d. outside the target range in both September and November To decrease aggregate demand, the bank of Canada can a. lower the overnight rate, decreasing the money supply b. lower the overnight rate, increasing the money supply c. raise the overnight rate, increasing the money supply d. raise the overnight rate, decreasing the money supply When the bank of Canada sells bonds on the bond market, this a. decreases-chartered bank reserves b. increases-chartered bank loans to the public c. lowers interest rates d. increases-chartered bank reserves

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11.3 Practice and Quiz Me Questions Which statement describes the impact of increasing the money supply? a. selling bonds lowers interest rates, decreasing aggregate demand (C+I+G+X-IM) b. buying bonds raises interest rates, increasing aggregate demand (C+I+G+X-IM) c. selling bonds raises interest rates, decreasing aggregate demand (C+I+G+X-IM) d. buying bonds lowers interest rates, increasing aggregate demand (C+I+G+X-IM) Which statement describes the impact of decreasing the money supply? a. selling bonds lowers interest rates, decreasing aggregate demand (C+I+G+X-IM) b. buying bonds raises interest rates, increasing aggregate demand (C+I+G+X-IM) c. selling bonds raises interest rates, decreasing aggregate demand (C+I+G+X-IM) d. buying bonds lowers interest rates, increasing aggregate demand (C+I+G+X-IM) The bank of Canada should increase interest rates today if, in 18-24 months, a. the unemployment rate is predicted to be above the natural rate b. real GDP is predicted to be above potential GDP c. real GDP is predicted to be below potential GDP d. it expects a recessionary gap The bank of Canada should decrease interest rates today if, in 18-24 months, a. the unemployment rate is predicted to be above the natural rate b. real GDP is predicted to be above potential GDP c. real GDP is predicted to be below potential GDP d. it expects a recessionary gap An increase in the money supply will a. raise interest rates and cause exchange rate to depreciate b. raise interest rates and cause exchange rate to appreciate c. lower interest rates and cause exchange rate to appreciate d. lower interest rates and cause exchange rate to depreciate

Monetary policy used to correct a recessionary gap causes the Canadian interest rate differential to a. decrease, leading to an appreciation of the Canadian dollar, decreasing net exports, and off-setting the domestic transmission mechanism b. decrease, leading to a depreciation of the Canadian dollar, increasing net exports, and reinforcing the domestic transmission mechanism c. increase, leading to an appreciation of the Canadian dollar, decreasing net exports, and reinforcing the domestic transmission mechanism d. decrease, leading to a depreciation of the Canadian dollar, decreasing net exports, and off-setting the domestic transmission mechanism Monetary policy used to correct a inflationary gap causes the Canadian interest rate differential to a. decrease, leading to an appreciation of the Canadian dollar, decreasing net exports, and off-setting the domestic transmission mechanism b. decrease, leading to a depreciation of the Canadian dollar, increasing net exports, and reinforcing the domestic transmission mechanism c. increase, leading to an appreciation of the Canadian dollar, decreasing net exports, and reinforcing the domestic transmission mechanism d. decrease, leading to a depreciation of the Canadian dollar, decreasing net exports, and off-setting the domestic transmission mechanism 11.4 Practice and Quiz Me Questions The timing of the monetary “gas” is crucial. If the central bank waits too long to step on the gas, it risks a. inflation b. a stagnating economy c. increasing aggregate demand d. decreasing consumer confidence A balance sheet recession a. is caused by the collapse of asset prices, requires that more borrowing occur to increase asset values b. makes it easier to steer the economy towards recovery because more borrowing occurs, making it difficult to control the money supply

c. causes transmission problems for monetary policy because players resist borrowing, spending, and lending. They opt instead for the security of money and savings d. makes monetary transmission faster with monetary policy because players are eager to borrow, which stimulates the economy During the global financial crisis (2008-2009), to counteract transmission breakdowns, central banks used a. international lending b. quantitative easing c. qualitative easing d. open market operations to sell bonds During the Global Financial Crisis, to counteract transmission breakdowns, the bank of Canada a. sold mortgages to foreign investors b. bought shares of publicly traded companies c. bought high – risk bonds from chartered banks d. sold mortgages to chartered banks The timing of the monetary “brake” is crucial. If the central bank steps on the brake too soon, it risks a. increased investment b. halting recovery from a recession c. decreasing consumer confidence d. lower interest rates 11.5 Practice and Quiz Me Questions

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Which of the following statements is true for only the “Yes, markets quickly self – adjust” camp? a. market failure is more likely than government failure b. hands – on government discretion for monetary policy is favoured c. hands – off rules for monetary policy are favoured d. inflation – control targets are useful for central banks Which of the following is true regarding Canada’s monetary policy? a. there is a central bank that achieves its inflation – control target jointly with the help of government b. there is a central bank with considerable independence that is ultimately responsible to parliament c. there is a significant government discretion for achieving the inflation – control target d. there is a central bank with little independence, ultimately responsible to parliament Inflation-rate targeting by an independent central bank a. feeds inflation expectations b. favours a hands – on emphasis on government decision c. anchors inflation expectations d. results in unpredictable price signals

Which of the following statements is true about the bank of canada? a. it has focused mainly on GDP growth – rate targeting since 1991 b. it has focused only on inflation – rate targeting since 1991 c. it has steered the economy toward zero unemployment d. it has steered the economy toward constant living standards The “no” camp favours a. a role for government in setting and conducting monetary policy b. fixed rules that leave no discretion for monetary policy c. hands – off rules for monetary policy d. none of the above Which of the following statements is true regarding Canada’s monetary policy? a. there is significant government discretion for achieving the inflation – control target b. there is a central bank that achieves its target jointly with the help of government c. there is an inflation – control target solely decided by government d. there is an inflation – control target jointly decided by the government and the bank of canada Which of the following statements is true for only the “No, markets fail to quickly self-adjust” camp? a. markets need a government – like central bank to function properly b. market failure is more likely than government failure c. hands – off rules for monetary policy are favoured d. fixed rules should leave no discretion for monetary policy Chapter 12 12.1 Practice and Quiz Me Questions The multiplier effect will decrease real GDP when there is a. an increase in government purchases b. an increase in transfers

c. a tax cut d. a tax increase The multiplier effect is smaller a. for business spending changes than for export changes b. when there are few leakages c. for tax and transfer changes than for government spending changes d. for changes in saving than for changes in business spending Which statement correctly describes the “no – markets can fail to adjust” view? a. aggregate demand shocks are a more important cause of business cycles than aggregate supply shocks b. tax increases should be used to slow down the economy c. tax cuts should be used to correct recessionary gaps d. tax cuts should be used to accelerate economic activity When the economy is at or above potential GDP, more of the increase in aggregate demand a. is due to increases in saving than increases in business spending b. increases real GDP c. drives up prices d. is due to increases in business spending than increases in exports

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Chapter 11 & 12 Practice and Quiz Me Questions

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