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Economics of Money, Banking, and Financial Markets 6e (Mishkin)

Chapter 16 Tools of Monetary Policy

16.1 The Framework for the Implementation of Monetary Policy

1) The interest rate on loans of reserves from one bank to another is ________.
A) the bank rate
B) the fed funds rate
C) the discount rate
D) the overnight rate
Answer: D
Diff: 1 Type: MC
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

2) The overnight rate is ________.


A) the interest rate on loans from the Bank of Canada
B) also know as the Bank rate
C) the rate banks give their best customers
D) the interest rate on loans of reserves from one bank to another
Answer: D
Diff: 1 Type: MC
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

3) The LVTS was put in place in order to eliminate the ________.


A) systemic risk
B) principal-agent problem
C) moral hazard problem
D) credit risk
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

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4) The risk to the entire payments system due to the inability of one financial institution to
fulfill its payment obligations in a timely fashion is known as ________.
A) systemic risk
B) the principal-agent problem
C) moral hazard
D) credit risk
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

5) Although transactions in the LVTS account for less than ________ of the total number of
transactions, they account for about ________ of the value of transactions.
A) 1 percent; 94 percent
B) 5 percent; 90 percent
C) 10 percent; 85 percent
D) 20 percent; 80 percent
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

6) The Large Value Transfer System (LVTS) ________.


A) was introduced on February 4, 1999
B) is the core of the Canadian payments system
C) is an electronic net settlement network designed to provide settlement to paper-based
payments items
D) A and B only.
Answer: D
Diff: 1 Type: MC
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

7) Large Value Transfer System (LVTS) participants can make a payment only if they
________.
A) have positive settlement balances in their accounts with the Bank of Canada
B) have posted collateral (such as Government of Canada treasury bills and bonds)
C) have explicit lines of credit with other participants
D) All of the above.
Answer: D
Diff: 1 Type: MC
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada
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8) The Large Value Transfer System (LVTS) ________.
A) is the core of the Canadian payments system
B) is an electronic net settlement network designed to provide settlement to wholesale
transactions
C) is an electronic net settlement network designed to provide settlement to paper-based
payment items
D) A and B only.
Answer: D
Diff: 1 Type: MC
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

9) Where only the net credit or debit position of each participant vis--vis all other participants
is calculated is known as ________.
A) multilateral netting
B) principal-agent netting
C) moral hazard netting
D) credit risk netting
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

10) Multilateral netting is ________.


A) the netting of the credit or debit position of each participant vis--vis all other participants
B) an electronic net settlement network designed to provide settlement to paper-based payment
items
C) the netting of the forward position of LVTS participants
D) None of the above.
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

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11) The Automated Clearing Settlement System (ACSS) ________.
A) is the core of the Canadian payments system
B) is an electronic net settlement network designed to provide settlement to wholesale
transactions
C) is an electronic net settlement network designed to provide settlement to paper-based
payment items
D) A and B only.
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

12) The ACSS is operated by the ________.


A) Canadian Payments Association
B) Bank of Canada
C) Ministry of Finance
D) LVTS
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

13) The Automated Clearing Settlement System (ACSS) ________.


A) was introduced on February 4, 1999
B) is an electronic net settlement network designed to provide settlement to wholesale
transactions
C) aggregates interbank payments and informs the Bank of Canada of the net amounts to be
transferred from and to each participant's settlement account with the Bank of Canada
D) A and B only.
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

14) The overnight market in Canada is ________ with a ________ range of participants.
A) very liquid; broad
B) very liquid; narrow
C) not very liquid; broad
D) not very liquid; narrow
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada
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Copyright 2017 Pearson Canada, Inc.
15) The overnight interest rate is also known as the ________.
A) the bank rate
B) the policy rate
C) reference rate
D) the growth rate of M2
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

16) The target for the overnight interest rate is also known as the ________.
A) the bank rate
B) the policy rate
C) reference rate
D) the growth rate of M2
Answer: B
Diff: 1 Type: MC
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

17) The primary indicator of the Bank of Canada's stance on monetary policy is ________.
A) the bank rate
B) the overnight rate
C) the growth rate of the monetary base
D) the growth rate of M2
Answer: B
Diff: 1 Type: MC
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

18) The overnight rate is important because it is ________.


A) the primary indicator of the Bank of Canada's stance on monetary policy
B) the interest rate paid on federal debt
C) the interest rate charged on government loans
D) A and C only.
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

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19) 45 basis points is equal to ________.
A) 0.45 percent
B) 0.045 percent
C) 4.5 percent
D) 45 percent
Answer: A
Diff: 1 Type: MC
Skill: Applied
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

20) Changes to the operating band are announced by the Bank of Canada ________ times a
year.
A) eight
B) six
C) four
D) two
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

21) The Bank of Canada's operating band is ________ basis points or ________.
A) 50; 0.5 percent
B) 100; 1 percent
C) 50; 5 percent
D) 100; 10 percent
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

22) The overnight interest rate ________.


A) is the shortest-term rate available
B) forms the base of any term structure of interest rates relation
C) is the rate the Bank of Canada charges LVTS participants with negative settlement balances
at the end of the banking day
D) A and B only.
Answer: D
Diff: 3 Type: MC
Skill: Applied
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

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Copyright 2017 Pearson Canada, Inc.
23) If the operating target of the Bank of Canada is 4.5 percent then the bank rate is ________.
A) 4.75 percent
B) 5.25 percent
C) 4.25 percent
D) 4.5 percent
Answer: A
Diff: 2 Type: MC
Skill: Applied
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

24) If the operating target of the Bank of Canada is 4 percent then the bank rate is ________.
A) 4.25 percent
B) 4.50 percent
C) 3.5 percent
D) 4 percent
Answer: A
Diff: 2 Type: MC
Skill: Applied
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

25) If the Bank of Canada pays on deposits to LVTS participants an interest rate of 3.5 percent
then the bank rate is ________.
A) 4 percent
B) 3.75 percent
C) 3.25 percent
D) 4.5 percent
Answer: A
Diff: 2 Type: MC
Skill: Applied
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

26) If the Bank of Canada pays on deposits to LVTS participants an interest rate of 3.5 percent
then the operating target of the Bank's monetary policy is ________.
A) 3.75 percent
B) 4 percent
C) 3.25 percent
D) 3 percent
Answer: A
Diff: 2 Type: MC
Skill: Applied
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

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Copyright 2017 Pearson Canada, Inc.
27) If the Bank of Canada pays on deposits to LVTS participants an interest rate of 3.5 percent
then the operating target of the Bank's monetary policy is ________ and the bank rate is
________.
A) 3.75 percent; 4 percent
B) 4 percent; 4.25 percent
C) 3.25 percent; 3.5 percent
D) 3 percent; 3.25
Answer: A
Diff: 3 Type: MC
Skill: Applied
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

28) If the Bank of Canada charges for negative settlement balances to LVTS participants an
interest rate of 3.5 percent then the operating target of the Bank's monetary policy is ________.
A) 3.25 percent
B) 3.75 percent
C) 3 percent
D) 4 percent
Answer: A
Diff: 2 Type: MC
Skill: Applied
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

29) The lower limit of the operating band for the overnight interest rate defines ________.
A) the bank rate
B) the prime rate
C) the rate the Bank of Canada pays LVTS participants with positive settlement balances at the
end of the banking day
D) the rate the Bank of Canada charges LVTS participants with negative settlement balances at
the end of the banking day
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

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Copyright 2017 Pearson Canada, Inc.
30) At the end of each banking day, each LVTS participant must bring its settlement balance
with the Bank of Canada ________.
A) close to zero
B) to a positive balance
C) to a negative balance
D) to at least $1 million
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

31) The lower limit of the operating band for the overnight interest rate is ________.
A) the bank rate
B) the prime rate
C) the rate the Bank of Canada charges LVTS participants with negative settlement balances at
the end of the banking day
D) 50 basis points below the bank rate
Answer: D
Diff: 1 Type: MC
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

32) If the operating band for the overnight interest rate is from 3.5 to 4.0 percent, then
________.
A) the bank rate is 4.0 percent
B) the bank rate is the lower limit of the operating band
C) the bank rate is the rate the Bank of Canada charges LVTS participants with negative
settlement balances at the end of the banking day
D) A and C only.
Answer: D
Diff: 1 Type: MC
Skill: Applied
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

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Copyright 2017 Pearson Canada, Inc.
33) If the operating band for the overnight interest rate is from 3.5 to 4.0 percent, then
________.
A) the rate on positive settlement balances at the Bank of Canada is 3.5 percent
B) the rate on positive settlement balances at the Bank of Canada is the lower limit of the
operating band
C) the bank rate is the lower limit of the operating band
D) A and B only.
Answer: D
Diff: 1 Type: MC
Skill: Applied
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

34) The operating band for the overnight interest rate is ________.
A) 50 basis points wide
B) defines the rate of interest the Bank of Canada charges LVTS participants with negative
settlement balances at the end of the banking day
C) defines the rate of interest the Bank of Canada pays LVTS participants with negative
settlement balances at the end of the banking day
D) A and B only.
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

35) Standing facilities ________.


A) refers to participant borrowing form each other to bring their settlement balances to zero at
the end of the banking day
B) refers to the Bank of Canada refusal to lend to or borrow from a participant to bring
their settlement balances to zero at the end of the banking day
C) refers to the Bank of Canada's building in Ottawa
D) refers to the Bank of Canada being ready to lend to or borrow from a participant to bring
their settlement balances to zero at the end of the banking day
Answer: D
Diff: 3 Type: MC
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

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Copyright 2017 Pearson Canada, Inc.
36) When the Bank of Canada lowers the operating band for the overnight interest rate, it
________.
A) lowers the bank rate by the same amount
B) encourages LVTS participants to borrow reserves either from each other or from the Bank of
Canada
C) it reduces the monetary base and ultimately the money supply
D) A and B only.
Answer: D
Diff: 1 Type: MC
Skill: Applied
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

37) If LVTS participating financial institutions have insufficient settlement balances ________.
A) they can borrow from each other in the pre-settlement trading period at the bank rate
B) they can borrow from each other in the pre-settlement trading period at the overnight rate
C) they can borrow from the Bank of Canada
D) B and C only.
Answer: D
Diff: 3 Type: MC
Skill: Applied
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

38) If LVTS participating financial institutions have insufficient settlement balances ________.
A) they can borrow from each other in the pre-settlement trading period
B) they can borrow from the Bank of Canada
C) they can borrow from the Bank of Canada at the prime rate
D) A and B only.
Answer: D
Diff: 3 Type: MC
Skill: Applied
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

39) LVTS participants with positive settlement balances at the end of the day ________.
A) are paid the bank rate
B) are paid the overnight rate
C) are paid the bank rate less 50 basis points
D) are paid the prime rate
Answer: C
Diff: 3 Type: MC
Skill: Applied
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

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Copyright 2017 Pearson Canada, Inc.
40) The rate spread at the Bank of Canada for LVTS balances is ________.
A) 300 basis points
B) 200 basis points
C) 50 basis points
D) 25 basis points
Answer: C
Diff: 1 Type: MC
Skill: Applied
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

41) What is the service provided by the LVTS? why is it important?


Answer: The LVTS is an electronic, real-time net settlement network, designed to provide
immediate finality and settlement to time-critical transactions. There are fourteen LVTS
participants and all other members of the Canadian Payments Association are able to arrange
LVTS payments for their clients through the LVTS participants. The importance of the LVTS
is that it eliminates systemic riskthe risk to the entire payments system due to the inability of
one financial institution to fulfill its payment obligations in a timely fashion.
Diff: 3 Type: ES
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

42) What is the function of the ACSS?


Answer: The ACSS is an electronic payments system operated by the Canadian Payments
Association. The ACSS aggregates interbank payments from non-LVTS paper-based payment
items such as cheques, travellers' cheques, gift certificates and money orders, and transfers the
net amounts from and to each participant's settlement account with the Bank of Canada. The
Bank completes the settlement the next day through the LVTS.
Diff: 2 Type: ES
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

43) What is the operating band for the overnight interest rate?
Answer: The Bank of Canada implements monetary policy by changing the overnight interest
rate in order to influence other short-term interest rates and the exchange rate. The Bank's
operational objective is to keep the overnight rate within a band of 50 basis points. Early in the
morning (9:00 am) on each of the eight specified dates within the year the Bank announces an
operating band of 50 basis points for the overnight rate.
Diff: 2 Type: ES
Skill: Recall
Objective: 16.1 Characterize the framework for the implementation of monetary policy in
Canada

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Copyright 2017 Pearson Canada, Inc.
16.2 The Market for Settlement Balances and the Channel/Corridor System for Setting the
Overnight Interest Rate

1) In Canada, the market for settlement balances (reserves) is where ________.


A) the federal funds rate is determined
B) the overnight interest rate is determined
C) the discount rate is determined
D) LIBOR is determined
Answer: B
Diff: 1 Type: MC
Skill: Recall
Objective: 16.2 Illustrate the market for reserves, and demonstrate how changes in monetary
policy can effect the equilibrium overnight interest rate

2) In the market for settlement balances, when the overnight interest rate is below the bank rate
and above the bank rate less 50 basis points, the supply curve of reserves is ________.
A) vertical
B) horizontal
C) positively sloped
D) negatively sloped
Answer: A
Diff: 3 Type: MC
Skill: Recall
Objective: 16.2 Illustrate the market for reserves, and demonstrate how changes in monetary
policy can effect the equilibrium overnight interest rate

3) The market equilibrium, in which the quantity of reserves demanded equals the quantity of
reserves supplied ________.
A) determines the overnight rate
B) occurs at the intersection of the vertical supply curve and the demand curve at the Bank of
Canada's target level of reserves
C) determines the interest rate charged on loans of these reserves
D) All of the above.
Answer: A
Diff: 3 Type: MC
Skill: Recall
Objective: 16.2 Illustrate the market for reserves, and demonstrate how changes in monetary
policy can effect the equilibrium overnight interest rate

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Copyright 2017 Pearson Canada, Inc.
4) When the overnight rate is up to 50 basis points below the bank rate ________.
A) the supply curve of settlement balances has a positive slope
B) the demand curve for settlement balances is vertical
C) the demand curve for settlement balances is horizontal
D) the demand curve for settlement balances has a negative slope
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 16.2 Illustrate the market for reserves, and demonstrate how changes in monetary
policy can effect the equilibrium overnight interest rate

5) The quantity of reserves demanded rises when the ________.


A) bank rate rises
B) bank rate falls
C) overnight funds rate rises
D) overnight rate falls
Answer: D
Diff: 1 Type: MC
Skill: Recall
Objective: 16.2 Illustrate the market for reserves, and demonstrate how changes in monetary
policy can effect the equilibrium overnight interest rate

6) The opportunity cost of holding excess reserves is ________.


A) the bank rate
B) the prime rate
C) the treasury bill rate
D) the overnight rate
Answer: D
Diff: 3 Type: MC
Skill: Recall
Objective: 16.2 Illustrate the market for reserves, and demonstrate how changes in monetary
policy can effect the equilibrium overnight interest rate

7) A rise in the overnight rate ________.


A) decreases the opportunity cost of holding desired reserves
B) lowers the opportunity cost of holding desired reserves
C) increases the opportunity cost of holding excess reserves
D) lowers the opportunity cost of holding excess reserves
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: 16.2 Illustrate the market for reserves, and demonstrate how changes in monetary
policy can effect the equilibrium overnight interest rate

14
Copyright 2017 Pearson Canada, Inc.
8) In the market for reserves, market equilibrium occurs where the ________.
A) quantity of reserves demanded equals the quantity supplied
B) quantity of reserves demanded is above the quantity supplied
C) quantity of reserves demanded is below the quantity supplied
D) quantity of reserves demanded does not equal the quantity supplied
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 16.2 Illustrate the market for reserves, and demonstrate how changes in monetary
policy can effect the equilibrium overnight interest rate

9) The channel/corridor system for setting interest rates ________.


A) is not appropriate for Canadian monetary policy
B) limits the amount banks can borrow from the central bank
C) enables the central bank to set the overnight, policy rate
D) is being phased out as a monetary policy tool
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: 16.2 Illustrate the market for reserves, and demonstrate how changes in monetary
policy can effect the equilibrium overnight interest rate

10) Explain why the bank rate is an upper limit for the overnight rate.
Answer: Anytime the overnight rate is below the bank rate, banks are going to borrow money
from each other in order to minimize their settlement balances with the bank of Canada. When
the overnight rate starts to rise and exceeds the bank rate, then banks will be able to borrow as
many funds as they require from the Bank of Canada by being charged the bank rate instead of
the overnight rate that is now higher. Thus the bank rate is a ceiling for the overnight rate.
Diff: 2 Type: ES
Skill: Applied
Objective: 16.2 Illustrate the market for reserves, and demonstrate how changes in monetary
policy can effect the equilibrium overnight interest rate

11) Explain why the bank rate minus 50 basis points (ib-50) is the lower limit for the overnight
rate.
Answer: When demand for reserves falls and the overnight rate tends to fall below the ib-50
rate, then the banks with excess reserves are better off leaving their credit (positive) balances
with the LVTS where they will get an interest rate of ib-50. Thus the overnight interest rate can
never fall below this point.
Diff: 3 Type: ES
Skill: Applied
Objective: 16.2 Illustrate the market for reserves, and demonstrate how changes in monetary
policy can effect the equilibrium overnight interest rate

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Copyright 2017 Pearson Canada, Inc.
16.3 The Bank of Canada's Approach to Monetary Policy

1) The goal of the Bank of Canada's current monetary policy is to keep the inflation rate within
a target range of ________.
A) 2 percent to 3 percent
B) 1 percent to 3 percent
C) 1 percent to 4 percent
D) 2 percent to 4 percent
Answer: B
Diff: 1 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

2) Monetary conditions are impacted by ________.


A) short-term interest rates and the foreign exchange rate
B) open market operations and the prime rate
C) the foreign exchange rate and the inflation rate
D) the Department of Finance
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

3) Core CPI excludes ________.


A) volatile components
B) headline items
C) indirect taxes
D) energy costs
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

4) If the Bank of Canada expects the economy to slow down, it ________ the operating band
for the overnight interest rate.
A) lowers
B) raises
C) leaves unchanged
D) stabilizes
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool
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Copyright 2017 Pearson Canada, Inc.
5) The Bank of Canada uses the ________ as its operating instrument.
A) nominal interest rate
B) real interest rate
C) open market operations
D) federal funds rate
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

6) It is the ________ assumption of ________ that allows for the transmission between nominal
and real interest rates.
A) new Keynesian; sticky prices
B) monetarist; sticky prices
C) new Keynesian; perfect markets
D) Bank of Canada; chartered banks allegiance to Canadian monetary policy
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

7) If the Bank of Canada expects the economy to to be exceeding its capacity, it ________ the
operating band for the overnight interest rate.
A) lowers
B) raises
C) leaves unchanged
D) stabilizes
Answer: B
Diff: 1 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

8) To keep inflation from falling below the target range, the Bank of Canada ________.
A) decreases the target for the overnight rate which causes the dollar to go down
B) decreases the target for the overnight rate which causes the dollar to go up
C) increases the target for the overnight rate which causes the dollar to go down
D) increases the target for the overnight rate which causes the dollar to go up
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

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Copyright 2017 Pearson Canada, Inc.
16.4 Conventional Monetary Policy Tools

1) The Bank of Canada ________ conducting open market operations in Government of


Canada treasury bills and bonds in 1994.
A) started
B) stopped
C) continued
D) implemented
Answer: B
Diff: 1 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

2) The Bank of Canada most common operations have been repurchase transactions with
________.
A) stockbrokers
B) primary dealers
C) the public
D) other central banks
Answer: B
Diff: 1 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

3) Special Purchase and Resale Agreements ________.


A) relieve undesired upward pressure on the overnight interest rate
B) alleviate undesired downward pressure on the overnight financing rate
C) relieve undesired downward pressure on the overnight interest rate
D) alleviate undesired volatility in the overnight financing rate
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

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Copyright 2017 Pearson Canada, Inc.
4) If the Bank of Canada wants to relieve undesired upward pressure on the overnight interest
rate it will enter into a ________.
A) Special Purchase and Resale Agreement
B) Sale and Repurchase Agreement
C) Swap
D) Reverse Repo
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

5) If the Bank of Canada wants to relieve undesired upward pressure on the overnight interest
rate it will enter into a ________.
A) Resale Agreement
B) Sale and Repurchase Agreement
C) Swap
D) Repo
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

6) A repo is a ________.
A) Resale Agreement
B) Purchase and Resale Agreement
C) Swap
D) Repo
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

7) Sale and Repurchase Agreements ________.


A) relieve undesired upward pressure on the overnight interest rate
B) alleviate undesired downward pressure on the overnight financing rate
C) relieve undesired downward pressure on the overnight interest rate
D) alleviate undesired volatility in the overnight financing rate
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

19
Copyright 2017 Pearson Canada, Inc.
8) If the Bank of Canada wants to alleviate undesired downward pressure on the overnight
financing rate it will enter into a ________.
A) Special Purchase and Resale Agreement
B) Sale and Repurchase Agreement
C) Swap
D) Repo
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

9) A reverse repo is a ________.


A) Special Purchase and Resale Agreement
B) Sale and Repurchase Agreement
C) Swap
D) Repo
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

10) If the Bank of Canada wants to alleviate undesired downward pressure on the overnight
financing rate it will enter into a ________.
A) Purchase and Resale Agreement
B) Repurchase Agreement
C) Swap
D) Reverse Repo
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

11) If the Bank of Canada wants to temporarily inject reserves in the banking system, it will
engage in ________.
A) a repurchase agreement
B) a "swap" transaction
C) a reverse repurchase agreement
D) None of the above.
Answer: A
Diff: 2 Type: MC
Skill: Applied
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

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Copyright 2017 Pearson Canada, Inc.
12) If the Bank of Canada wants to temporarily drain reserves from the banking system, it will
engage in ________.
A) a repurchase agreement
B) a sale and repurchase agreement
C) a "pump" agreement
D) None of the above.
Answer: B
Diff: 2 Type: MC
Skill: Applied
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

13) The Bank of Canada will engage in a sale and repurchase agreement when it wants to
________ reserves ________ in the banking system.
A) increase; permanently
B) increase; temporarily
C) decrease; temporarily
D) decrease; permanently
Answer: C
Diff: 2 Type: MC
Skill: Applied
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

14) The Bank of Canada will engage in a repurchase and resale agreement when it wants to
________ reserves ________ in the banking system.
A) increase; permanently
B) increase; temporarily
C) decrease; temporarily
D) decrease; permanently
Answer: B
Diff: 2 Type: MC
Skill: Applied
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

15) SPRAs and SRAs are ________ open market operations.


A) temporary
B) permanent
C) risky
D) conducted 8 times a year
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

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Copyright 2017 Pearson Canada, Inc.
16) The Bank of Canada's repurchase transactions are an advantage because ________.
A) they occur at the initiative of the Bank of Canada
B) the bank has complete control over the volume
C) they are monopolized by the Bank of Canada
D) A and B only.
Answer: D
Diff: 2 Type: MC
Skill: Applied
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

17) If the Bank of Canada wants to temporarily inject reserves in the banking system, it will
engage in ________.
A) a repurchase agreement
B) a "swap" transaction
C) a reverse repurchase agreement
D) None of the above.
Answer: A
Diff: 2 Type: MC
Skill: Applied
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

18) If the Bank of Canada wants to temporarily drain reserves from the banking system, it will
engage in ________.
A) a repurchase agreement
B) a sale and repurchase agreement
C) a "pump" agreement
D) None of the above.
Answer: B
Diff: 2 Type: MC
Skill: Applied
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

19) The Bank of Canada will engage in a repurchase agreement when it wants to ________
reserves ________ in the banking system.
A) increase; permanently
B) increase; temporarily
C) decrease; temporarily
D) decrease; permanently
Answer: B
Diff: 2 Type: MC
Skill: Applied
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

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Copyright 2017 Pearson Canada, Inc.
20) In addition to targeting the overnight interest rate at the mid-point of the operating band, the
Bank of Canada also targets ________.
A) the prime rate
B) the level of settlement balances
C) the treasury bill rate
D) the money multiplier
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

21) If government deposits at the Bank of Canada are predicted to increase, the manager of the
trading desk at the Bank will likely conduct activities to ________ reserves.
A) inject
B) drain
C) reverse
D) flood
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

22) The target for settlement balances is set at ________.


A) zero with no adjustments for any pressures on the overnight rate
B) zero but the Bank makes adjustments depending on pressures on the overnight rate
C) zero but the Bank makes adjustments depending on pressures on the prime rate
D) always positive with no adjustments
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

23) The Bank of Canada neutralizes special PRA operations so as to ________.


A) not to leave the system in a surplus position at the end of the day
B) to leave the system in a surplus position at the end of the day
C) to leave the system changed at the end of the day
D) as to leave the system in a deficit position at the end of the day
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

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Copyright 2017 Pearson Canada, Inc.
24) The Bank of Canada neutralizes SRA operations so as to ________.
A) not to leave the system in a surplus position at the end of the day
B) to leave the system in a surplus position at the end of the day
C) as not to leave the system in a deficit position at the end of the day
D) as to leave the system in a deficit position at the end of the day
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

25) The Bank of Canada neutralizes government receipts by ________.


A) arranging an increase in government deposit auctions
B) leaving the system in a surplus position at the end of the day
C) reducing the banking system's settlement balances
D) leaving the system in a deficit position at the end of the day
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

26) If government deposits at the Bank of Canada are predicted to decrease the Bank will offset
the transaction through LVTS transfers to ________ settlement balances.
A) increase
B) decrease
C) flood
D) inject
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

27) If government deposits at the Bank of Canada are predicted to increase, the Bank will offset
the transaction through government debt auctions to ________ settlement balances.
A) decrease
B) increase
C) inflate
D) drain
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

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Copyright 2017 Pearson Canada, Inc.
28) If government deposits at the Bank of Canada are predicted to decrease, the Bank will
offset the transaction through government deposit auctions to ________ settlement balances.
A) decrease
B) increase
C) inject
D) resupply
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

29) The facility at which banks can borrow reserves from the Bank of Canada is called the
________.
A) standing lending facility
B) temporary lending facility
C) permanent lending facility
D) daily lending facility
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

30) A standing lending facility is ________.


A) the facility at which banks can borrow reserves from the Bank of Canada
B) a temporary lending facility
C) a permanent lending facility
D) a daily lending facility
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

31) One of the Bank of Canada's most important roles is to be ________.


A) the Federal government's banker
B) the issuer of government debt
C) a lender-of-last-resort
D) a regulator of banks
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

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Copyright 2017 Pearson Canada, Inc.
32) The Bank of Canada's lender-of-last-resort function ________.
A) is no longer necessary due to CDIC insurance
B) has proven to be ineffective
C) is needed to prevent runs by large-denomination depositors
D) A and B only.
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

33) Explain the Bank of Canada's open market operations? What are SPRAs and SRAs? How
are they used to impact the overnight rate?
Answer: SPRA is special Purchase and Resale Agreement and SRA is a Sale and Repurchase
Agreement. SPRAS are used to relieve undesired upward pressure on the overnight interest
rate. SRAs alleviated undesired downward pressure on the overnight financing rate. Both are
temporary measures.
Diff: 2 Type: ES
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

34) What are the advantages of SPRAs and SRAs?


Answer: 1. The Bank of Canada has complete control over them as they occur at the initiative
of the Bank of Canada.
2. They are flexible and precise; together with the Bank's standing facilities they can be used to
any extent.
3. They are easily reversed.
4. They can be implemented quickly.
Diff: 3 Type: ES
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

35) What are the advantages and disadvantages of the Bank's lending policy?
Answer: The most important advantage is that the Bank can use it to perform its role of lender
of last resort. But it is less effective compared to open market operations for two reasons. Open
market buyback operations are completely at the discretion of the Bank of Canada, whereas the
volume of normal advances is not. The Bank can change the bank rate but in the current
channel/corridor system can't make banks borrow. In addition, open market buyback operations
are more easily reversed than changes in Bank lending policy.
Diff: 3 Type: ES
Skill: Recall
Objective: 16.3 Summarize how conventional monetary policy tools are implemented and the
relative advantages and limitations of each tool

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Copyright 2017 Pearson Canada, Inc.
16.5 Nonconventional Monetary Policy Tools During the Global Financial Crisis

1) The purchase of financial assets by the central bank through the creation of excess reserves
for banks is known as ________.
A) quantitative easing
B) conditional statements about the future path of the policy rate
C) interest rate expectations
D) credit easing
Answer: A
Diff: 3 Type: MC
Skill: Recall
Objective: 16.5.1 Explain the key monetary policy tools that are used when conventional
monetary policy is no longer effective

2) Quantitative easing is regarded as an unconventional form of monetary policy because it


targets the ________.
A) the price of liquidity
B) the overnight interest rate
C) the amount of liquidity provided by the central bank instead of targeting the price of
liquidity
D) settlement balances
Answer: C
Diff: 3 Type: MC
Skill: Recall
Objective: 16.5.1 Explain the key monetary policy tools that are used when conventional
monetary policy is no longer effective

3) Quantitative easing is regarded as ________.


A) the price of liquidity
B) a high-risk monetary policy tool
C) a low-risk monetary policy tool
D) a desired policy
Answer: B
Diff: 3 Type: MC
Skill: Recall
Objective: 16.5.1 Explain the key monetary policy tools that are used when conventional
monetary policy is no longer effective

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Copyright 2017 Pearson Canada, Inc.
4) Quantitative easing is a high-risk monetary policy tool as it runs the risk of ________.
A) possibly creating deflation
B) possibly creating inflation and even hyperinflation
C) having no effect
D) having very short-term effects
Answer: B
Diff: 3 Type: MC
Skill: Recall
Objective: 16.5.1 Explain the key monetary policy tools that are used when conventional
monetary policy is no longer effective

5) The purchase of private sector assets by the central bank in critical markets is known as
________.
A) quantitative easing
B) conditional statements about the future path of the policy rate
C) managing interest rate expectations
D) credit easing
Answer: D
Diff: 3 Type: MC
Skill: Recall
Objective: 16.5.1 Explain the key monetary policy tools that are used when conventional
monetary policy is no longer effective

6) The difference between Term PRAs and special PRAs, is that term PRAs have ________.
A) a term shorter than one business day, typically a term of 2 hours
B) a term longer than one business day, typically a term of 28 business days
C) a term longer than year, typically a term of 3 years
D) a term longer than one business day, typically a term of 6 months
Answer: B
Diff: 3 Type: MC
Skill: Recall
Objective: 16.5.1 Explain the key monetary policy tools that are used when conventional
monetary policy is no longer effective

7) The Bank of Canada commitments regarding the operating band for the overnight interest
rate to align market expectations of future short-term interest rates with those of the Bank are
known as ________.
A) quantitative easing
B) conditional statements about the future path of the policy rate
C) interest rate expectations
D) credit easing
Answer: B
Diff: 3 Type: MC
Skill: Recall
Objective: 16.5.1 Explain the key monetary policy tools that are used when conventional
monetary policy is no longer effective

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Copyright 2017 Pearson Canada, Inc.
8) The Federal Reserve's lending of reserves to banks is called ________ lending.
A) discount window
B) term
C) prime
D) target
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 16.5.2 Identify the distinctions and similarities between the monetary policy tools of
the Bank of Canada and those of the Federal Reserve and the European Central Bank

9) The lending facility at the Federal Reserve sets a ________ on the short-term overnight
interest rates.
A) ceiling
B) floor
C) target
D) ceiling and floor
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 16.5.2 Identify the distinctions and similarities between the monetary policy tools of
the Bank of Canada and those of the Federal Reserve and the European Central Bank

10) The primary indicator of the stance of monetary policy in the U.S. is the ________.
A) federal funds rate
B) discount rate
C) overnight rate
D) prime rate
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 16.5.2 Identify the distinctions and similarities between the monetary policy tools of
the Bank of Canada and those of the Federal Reserve and the European Central Bank

11) The European Central bank uses the ________ to signal its stance on monetary policy.
A) target financing rate
B) overnight cash rate
C) overnight bank rate
D) discount window
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 16.5.2 Identify the distinctions and similarities between the monetary policy tools of
the Bank of Canada and those of the Federal Reserve and the European Central Bank

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Copyright 2017 Pearson Canada, Inc.
12) Describe some of the actions the Bank of Canada took to mitigate the effects of widening
spreads and increased volatility in the term interbank market in the second half of 2008.
Answer: The Bank of Canada announced that it would enter into a series 28-day PRA
transactions, thereby injecting huge amounts of liquidity in the markets. Moreover, the Bank
expanded its list of acceptable collateral to include bank-sponsored asset-backed commercial
paper and U.S. Treasuries. It also expanded its list of eligible counterparties. In engaging in
these trades, the Bank takes securities onto its books in exchange for borrowings from the
Bank's standing lending facility.
Diff: 3 Type: ES
Skill: Recall
Objective: 16.5.2 Identify the distinctions and similarities between the monetary policy tools of
the Bank of Canada and those of the Federal Reserve and the European Central Bank

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Copyright 2017 Pearson Canada, Inc.