Question 1

Which of the following is an asset on the balance sheet of the Bank of Canada?

Accepted Answer

A)   reserves of chartered banks
B)   Government of Canada deposits
C)   Bank of Canada notes in circulation
D)   advances to chartered banksE) C) and D)
F) B) and D)

Question 2

An increase in nominal GDP increases the demand for money because:

Accepted Answer

A)   interest rates will rise.
B)   more money is needed to finance a larger volume of transactions.
C)   bond prices will fall.
D)   the opportunity cost of holding money will decline.E) A) and B)
F) A) and D)

Question 3

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

Accepted Answer

A)   an increase in nominal GDP.
B)   an increase in the interest rate.
C)   a decline in the interest rate.
D)   a decline in nominal GDP.E) A) and B)
F) A) and C)

Question 4

The price of a bond with no expiration date is $1,000 and the fixed annual interest payment is $100. If the price of the bond falls to $800, the interest rate to a new buyer of the bond is now 8.5 percent.

Accepted Answer

A) True 
 B)False

Question 5

Assume that a single chartered bank has no excess reserves and that the desired reserve ratio is 20 percent. If this bank sells a bond for $1,000 to the Bank of Canada, it can expand its loans by a maximum of:

Accepted Answer

A)   $1,000.
B)   $2,000.
C)   $200.
D)   $800.E) None of the above
F) All of the above

Question 6

The purchase of government securities from the public by the Bank of Canada will cause:

Accepted Answer

A)   chartered bank reserves to increase.
B)   the money supply to increase.
C)   demand deposits to increase.
D)   all of the above to occur.E) C) and D)
F) None of the above

Question 7

The asset demand for money is downward sloping because:

Accepted Answer

A)   the opportunity cost of holding money increases as the interest rate rises.
B)   it is more attractive to hold money at high interest rates than at low interest rates.
C)   bond prices rise as interest rates rise.
D)   the opportunity cost of holding money declines as the interest rate rises.E) C) and D)
F) B) and D) A

Question 8

On a diagram wherein the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the transactions 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) A) and D)

Question 9

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

Accepted Answer

A)   line 4
B)   line 3
C)   line 2
D)   line 1E) A) and B)
F) A) and C)

Question 10

If in the market for money the quantity of money demanded exceeds the money supply, we would expect the interest rate to:

Accepted Answer

A)   fall, causing households and businesses to hold less money.
B)   rise, causing households and businesses to hold less money.
C)   rise, causing households and businesses to hold more money.
D)   fall, causing households and businesses to hold more money.E) All of the above
F) C) and D)

Question 11

-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) A) and B)
F) C) and D) D

Question 12

Quantitative easing refers to the purchasing of private sector assets by a country's central bank in order to provide liquidity to the financial system.

Accepted Answer

A) True 
 B)False

Question 13

Monetary policy is thought to be:

Accepted Answer

A)   equally effective in moving the economy out of a recession as in controlling inflation.
B)   more effective in moving the economy out of a recession than in controlling inflation.
C)   only effective in moving the economy out of a recession.
D)   more effective in controlling inflation than in moving the economy out of a recession.E) A) and D)
F) A) and C)

Question 14

In the consolidated balance sheet of the Bank of Canada, chartered bank reserves held by the Bank of Canada 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 chartered banks and an asset for the Bank of Canada.
D)   an asset of the chartered banks and a liability for the Bank of Canada.E) C) and D)
F) B) and D)

Question 15

The prime interest rate:

Accepted Answer

A)   affects investment spending while the overnight rate affects consumption spending.
B)   affects consumption spending while the overnight rate affects investment spending.
C)   has no effect on exchange rates and net exports.
D)   affects investment spending while the overnight rate affects overnight borrowing of bank reserves.E) B) and D)
F) None of the above

Question 16

The asset demand for money:

Accepted Answer

A)   is unrelated to both the interest rate and the level of GDP.
B)   varies inversely with the rate of interest.
C)   varies inversely with the level of real GDP.
D)   varies directly with the level of nominal GDP.E) B) and C)
F) A) and B)

Question 17

An expansionary monetary policy is designed to correct a problem of high unemployment and sluggish economic growth.

Accepted Answer

A) True 
 B)False

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 B)
F) None of the above B

Question 19

Which of the following statements best describes the Bank of Canada? It is:

Accepted Answer

A)   a publicly owned and publicly controlled central bank, whose basic goal is to provide income for the Government of Canada.
B)   a privately owned and publicly controlled central bank, whose basic goal is to earn profits for its owners.
C)   a publicly owned and publicly controlled central bank, whose basic goal is to control the money supply and interest rates and maintain price stability and it is an independent agency of government.
D)   a privately owned and publicly controlled central bank, whose basic function is to minimize the risks in chartered banking in order to make it a reasonably profitable industry.E) None of the above
F) C) and D)

Question 20

Refer to the diagram below for the market for money. Other things equal, the money demand curve in the diagram would shift leftward if:

Accepted Answer

A)   the asset demand for money increased.
B)   the transactions demand for money increased.
C)   nominal GDP decreased.
D)   the overall price level rose.E) C) and D)
F) A) and B)

Exam 13: Interest Rates and Monetary Policy

Which of the following is an asset on the balance sheet of the Bank of Canada?

Correct AnswerverifiedShow Answer

An increase in nominal GDP increases the demand for money because:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The price of a bond with no expiration date is $1,000 and the fixed annual interest payment is $100. If the price of the bond falls to $800, the interest rate to a new buyer of the bond is now 8.5 percent.

Correct AnswerverifiedShow Answer

Assume that a single chartered bank has no excess reserves and that the desired reserve ratio is 20 percent. If this bank sells a bond for $1,000 to the Bank of Canada, it can expand its loans by a maximum of:

Correct AnswerverifiedShow Answer

The purchase of government securities from the public by the Bank of Canada will cause:

Correct AnswerverifiedShow Answer

The asset demand for money is downward sloping because:

Correct AnswerverifiedA

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

If in the market for money the quantity of money demanded exceeds the money supply, we would expect the interest rate to:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedD

Quantitative easing refers to the purchasing of private sector assets by a country's central bank in order to provide liquidity to the financial system.

Correct AnswerverifiedShow Answer

Monetary policy is thought to be:

Correct AnswerverifiedShow Answer

In the consolidated balance sheet of the Bank of Canada, chartered bank reserves held by the Bank of Canada are:

Correct AnswerverifiedShow Answer

The prime interest rate:

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The asset demand for money:

Correct AnswerverifiedShow Answer

An expansionary monetary policy is designed to correct a problem of high unemployment and sluggish economic growth.

Correct AnswerverifiedShow Answer

Notes in circulation are:

Correct AnswerverifiedB

Which of the following statements best describes the Bank of Canada? It is:

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Refer to the diagram below for the market for money. Other things equal, the money demand curve in the diagram would shift leftward if:

Correct AnswerverifiedShow Answer

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A

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D

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B

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