Macroeconomics Canadian 1st Edition Hubbard Test Bank

Macroeconomics, Canadian Ed. (Hubbard et al.
)
Chapter 11 Monetary Policy
11.1 What Is Monetary Policy?
1) Canadian households have high debt ratios in excess of 150 percent, and there is fear that
already leveraged Canadians will take on more debt. The reason for this is
A) the Bank of Canada lowered interest rates as Canada entered the 2007-2009 recession, after
raising interest rates to help fight inflation.
B) the Bank of Canada lowered interest rates as Canada entered the 2007-2009 recession and
interest rates had already been low in the preceeding five years.
C) the Bank of Canada raised interest rates as Canada entered the 2007-2009 recession and
interest rates had already been high in the preceeding five years.
D) the Bank of Canada raised interest rates as Canada entered the 2007-2009 recession, after
lowering interest rates to help fight inflation.
Answer: B
Diff: 1 Type: MC Page Ref: 325
Topic: How Interest Rates Affect Aggregate Demand
Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada’s monetary
policy goals
AACSB: Reflective Thinking
Special Feature: Chapter Opener: Monetary Policy and the Canadian Housing Market
2) If the probability of losing your job remains ________, a recession would be a good time to
purchase a home because the Bank of Canada usually ________ interest rates during this time.
A) low; lowers
B) low; raises
C) high; lowers
D) high; raises
E) low; does not change
Answer: A
Topic: Monetary Policy and Recessions
policy goals
Special Feature: Economics in Your Life: Should You Buy a House During a Recession?
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Copyright © 2015 Pearson Canada Inc.
3) Monetary policy refers to the actions the

A) Prime Minister and Parliament take to manage the money supply and interest rates to pursue
their economic objectives.
B) Bank of Canada takes to manage the money supply and interest rates to pursue its
macroeconomic policy objectives.
C) Prime Minister and Parliament take to manage government spending and taxes to pursue their
economic objectives.
D) Bank of Canada takes to manage government spending and taxes to pursue its economic
objectives.
Answer: B
Topic: What is Monetary Policy?
policy goals
Special Feature: None
4) The Bank of Canada system's four monetary policy goals are

A) low government budget deficits, low current account deficits, high employment, and a high
foreign exchange value of the dollar.
B) rate of bank failures, high reserve ratios, price stability, and economic growth.
C) price stability, high employment, economic growth, and stability of financial markets and
institutions.
D) price stability, low government budget deficits, low current account deficits, and low rate of
bank failures.
Answer: C
Topic: The Goals of Monetary Policy
policy goals
5) When the Bank of Canada Act was passed in 1934, it was stated that the main responsibility is
to conduct monetary policy to
A) prevent bank panics.
B) promoting price stability.
C) promote the best interests of economic life of Canada.
D) keeping employment high.
Answer: C
policy goals
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6) The turmoil in financial markets that began in 2007 led the Bank of Canada to put new
emphasis on
A) fighting inflation.
B) increasing employment.
C) increasing economic growth.
D) increasing regulation of commercial banks.
E) increasing financial market stability.
Answer: E
policy goals
7) The Bank of Canada does not regulate financial institutions, but it does act as the "lender of
last resort" by lending to commercial banks when they are temporarily short of funds. The goal
of the Bank of Canada filling this role is to
A) reduce the rate of inflation.
B) stimulate economic growth.
C) reduce unemployment.
D) reassure financial markets and promote financial stability.
E) reduce the current account deficit.
Answer: D
policy goals
8) The goals of monetary policy tend to be interrelated. For example, when the Bank of Canada
pursues the goal of ________, it also can achieve the goal of ________ simultaneously.
A) high employment; economic growth
B) high employment; lowering government spending
C) economic growth; a low current account deficit
D) stability of financial markets; a low current account deficit
Answer: A
policy goals
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9) One of the monetary policy goals of the Bank of Canada is price stability.
Answer: TRUE
Diff: 1 Type: TF Page Ref: 326-327
policy goals
10) Since World War II, the Bank of Canada has not been involved in carrying out monetary
policy.
Answer: FALSE
Diff: 1 Type: TF Page Ref: 326
policy goals
11) Inflation rates during the years 1979-1981 were the highest Canada has ever experienced
post-1950.
Answer: TRUE
policy goals
12) List the Bank of Canada's four main monetary goals.

Answer:
1. Price stability
2. High employment
3. Stability of financial markets and institutions
4. Economic growth
Diff: 2 Type: ES Page Ref: 326
policy goals
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13) What is a symmetric inflation targeting, and what does it mean for the Bank of Canada?
Answer: Symmetric inflation targeting means that a central bank is equally concerned with
inflation rising above the target as inflation falling below its target. This means the Bank of
Canada must be weary of high inflation as well as deflation (a decline in the price level).
policy goals
11.2 The Money Market and the Bank of Canada's Choice of Monetary Policy Targets
1) The Bank of Canada's two main ________ are the money supply and the interest rate.
A) monetary policy targets
B) policy tools
C) fiscal policy targets
D) fiscal tools
Answer: A
Topic: Monetary Policy Targets
Learning Outcome: 11.2 Describe the Bank of Canada’s monetary policy targets and explain
how expansionary and contractionary monetary policies affect the interest rate
2) The Bank of Canada can directly affect its monetary policy ________, which then affect its
monetary policy ________.
A) goals; targets
B) goals; tools
C) targets; goals
D) targets; tools
Answer: C
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3) The money demand curve has a

A) negative slope because an increase in the interest rate decreases the quantity of money
demanded.
B) positive slope because an increase in the interest rate increases the quantity of money
demanded.
C) negative slope because an increase in the price level decreases the quantity of money
demanded.
D) positive slope because an increase in the price level increases the quantity of money
demanded.
Answer: A
Topic: Money Demand
4) An increase in the interest rate

A) decreases the opportunity cost of holding money.
B) increases the opportunity cost of holding money.
C) decreases the percentage yield of holding money.
D) increases the percentage yield of holding money.
Answer: B
Topic: Money Demand
5) An increase in the interest rate causes

A) a movement up along the money demand curve.
B) a movement down along the money demand curve.
C) the money demand curve to shift to the left.
D) the money demand curve to shift to the right.
Answer: A
Topic: Money Demand
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6) An increase in the price level causes

A) the money demand curve to shift to the left.
B) the money demand curve to shift to the right.
C) a movement up along the money demand curve.
D) a movement down along the money demand curve.
Answer: B
Topic: Money Demand
7) Which of the following would cause the money demand curve to shift to the left?
A) an open market purchase of Government of Canada securities by the Bank of Canada
B) an increase in the interest rate
C) an increase in the price level
D) a decrease in real GDP
Answer: D
Topic: Money Demand
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Figure 11.1
8) Refer to Figure 11.1. In the figure, the money demand curve would move from MD1 to MD2
if
A) real GDP increased.
B) the price level decreased.
C) the interest rate increased.
D) the Bank of Canada sold government of Canada securities.
Answer: A
Topic: Money Demand
9) Using the money demand and money supply model, an open market purchase of government
of Canada securities by the Bank of Canada would cause the equilibrium interest rate to
A) increase.
B) decrease.
C) not change.
D) increase if the economy is in a recession.
Answer: B
Topic: Equilibrium in the Money Market
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10) Using the money demand and money supply model, an open market sale of government of
Canada securities by the Bank of Canada would cause the equilibrium interest rate to
A) increase.
B) decrease.
C) not change.
D) increase, then decrease.
Answer: A
11) Suppose that households became mistrustful of the banking system and decide to decrease
their checking accounts and increase their holdings of currency. Using the money demand and
money supply model and assuming everything else is held constant, the equilibrium interest rate
should
A) increase.
B) decrease.
C) not change.
Answer: A
AACSB: Analytic Skills
12) Using the money demand and money supply model, an increase in money demand would
cause the equilibrium interest rate to
A) decrease.
B) increase.
C) not change.
Answer: B
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13) Which of the following will lead to a decrease in the equilibrium interest rate in the
economy?
A) an increase in the price level
B) a sale of government of Canada securities by the Bank of Canada
C) a decrease in GDP
D) an increase in the discount rate
E) an increase in the reserve requirement
Answer: C
14) An increase in real GDP can shift

A) money demand to the right and decrease the equilibrium interest rate.
B) money demand to the right and increase the equilibrium interest rate.
C) money demand to the left and decrease the equilibrium interest rate.
D) money demand to the left and increase the equilibrium interest rate.
Answer: B
15) When the Bank of Canada increases the money supply, at the previous equilibrium interest
rate households and firms will now have
A) more money than they want to hold.
B) less money than they want to hold.
C) the amount of money that they want to hold.
D) to sell Treasury bills.
Answer: A
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16) When the Bank of Canada decreases the money supply, at the previous equilibrium interest
rate households and firms will now want to
A) buy government of Canada securities.
B) sell government of Canada securities
C) neither buy nor sell government of Canada securities.
D) hold less money.
Answer: B
Diff: 3 Type: MC Page Ref: 330-331
17) An increase in the demand for government of Canada securities will

A) increase the price of government of Canada securities.
B) increase the interest rate on government of Canada securities.
C) increase the opportunity cost of holding money vs. government of Canada securities.
D) eventually cause households to hold less money.
Answer: A
18) Which of the following is true?

A) The money market model is essentially a model that determines the short-term nominal rate
of interest.
B) The money market model is essentially a model that determines the short-term real rate of
interest.
C) The loanable funds model is essentially a model that determines the short-term real rate of
interest.
D) The loanable funds model is essentially a model that determines the long-term nominal rate of
interest.
Answer: A
Topic: A Tale of Two Interest Rates
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Figure 11.2
19) Refer to Figure 11.2. In the figure above, when the money supply shifts from MS1 to MS2,
at the interest rate of 3 percent households and firms will
A) buy Canada bonds.
B) sell Canada bonds.
C) neither buy nor sell Canada bonds.
D) want to hold less money.
Answer: B
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Figure 11.3
20) Refer to Figure 11.3. In the figure above, when the money supply shifts from MS1 to MS2,
at the interest rate of 3 percent households and firms will
A) buy Canada bonds.
B) sell Canada bonds
C) neither buy nor sell Canada bonds.
D) want to hold more money.
Answer: A
21) For purposes of monetary policy, the Bank of Canada has targeted the interest rate known as
the
A) overnight interest rate.
B) Canada bond rate.
C) discount rate.
D) prime rate.
Answer: A
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22) The monetary policy target the Bank of Canada focuses primarily on today is
A) the unemployment rate.
B) M1.
C) the inflation rate.
D) the overnight interest rate.
E) M2.
Answer: D
23) The interest rate that banks charge other banks for overnight loans is the
A) prime rate.
B) discount rate.
C) overnight interest rate.
D) Canada bond rate.
Answer: C
Topic: The Overnight Interest Rate
24) Changes in the overnight interest rate usually result in

A) changes in both short-term and long-term interest rates with more of an effect on short-term
interest rates.
B) changes in both short-term and long-term interest rates with more of an effect on long-term
interest rates.
C) changes in both short-term and long-term interest rates with equal effect on both.
D) no change in both short-term and long-term interest rates.
Answer: A
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25) The Bank of Canada can increase the overnight interest rate by
A) selling Canada bonds, which increases bank reserves.
B) buying Canada bonds, which increases bank reserves.
C) selling Canada bonds, which decreases bank reserves.
D) buying Canada bonds, which decreases bank reserves.
Answer: C
Diff: 2 Type: MC Page Ref: 872-873/498-499
26) The Bank of Canada can directly lower the inflation rate.
Answer: FALSE
27) The Bank of Canada can simultaneously reduce the inflation rate and stimulate growth
through lowering interest rates.
Answer: FALSE
28) A monetary policy target is a variable that the Bank of Canada can affect directly, which then
affects one or more of the Bank of Canada's policy goals.
Answer: TRUE
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29) Does the money demand curve have a positive slope or a negative slope? Why does it have
this slope? Explain why an increase in the variable on the vertical axis of the money demand
curve causes either an increase or a decrease in the variable on the horizontal axis of the money
demand curve.
Answer: The money demand curve has a negative slope. An increase in the interest rate, the
variable on the vertical axis, causes a decrease in the quantity of money demanded, the variable
on the horizontal axis, because an increase in the interest rate increases the opportunity cost of
holding money. Money earns little or no interest, so an increase in the interest rate induces
people to reduce their holdings of money and switch into interest-bearing financial assets.
Diff: 3 Type: ES Page Ref: 328-329
Topic: Money Demand
30) Use the money demand and money supply model to show graphically and explain the effect
on interest rates of the Bank of Canada's open market sale of government of Canada securities
Answer: An open market sale of government of Canada securities by the Bank of Canada
decreases the money supply from MS1 to MS2, raising the interest rate from 3% to 4%.

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31) Use the money demand and money supply model to show the money market in equilibrium
with an interest rate of 5 percent and the quantity of money of $80 billion. Suppose the Bank of
Canada increases the money supply to $85 billion. At the previous equilibrium interest rate of 5
percent, will households and firms now be holding more money or less money than they want to
hold, and will they be buying or selling short-term financial assets? At the new equilibrium
interest rate, households and firms will desire to hold the entire $85 billion of the money supply.
What causes households and firms to want to hold the additional $5 billion of the money supply?
Answer: They will be holding more money than they want to hold, so they will buy short-term
financial assets. The lower interest rate at the new equilibrium decreases the opportunity cost of
holding money, so households and firms desire to hold more money.

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32) Use the money demand and money supply model to show graphically and briefly explain the
effect on the interest rate if real GDP increases.
Answer: The increase in real GDP shifts the money demand curve to the right from MD1 to
MD2, raising the interest rate from 4% to 5%.

11.3 Monetary Policy and Economic Activity
1) The ability of the Bank of Canada to use monetary policy to affect economic variables such as
real GDP ultimately depends upon its ability to affect
A) tax rates.
B) real interest rates.
C) nominal interest rates.
D) foreign exchange rates.
Answer: B
Topic: Monetary Policy and Economic Activity
Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects
of monetary policy on real GDP and the price level
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2) An increase in interest rates

A) decreases investment spending on machinery, equipment and factories, but increases
consumption spending on durable goods and net exports.
B) decreases investment spending on machinery, equipment and factories, and consumption
spending on durable goods, but increases net exports.
C) decreases investment spending on machinery, equipment and factories, consumption spending
on durable goods, and net exports.
D) increases investment spending on machinery, equipment and factories, consumption spending
on durable goods, and net exports.
Answer: C
3) A decrease in interest rates can ________ the demand for stocks as stocks become relatively
________ attractive investments as compared to bonds.
A) increase; more
B) decrease; less
C) decrease; more
D) increase; less
E) increase; similar
Answer: A
4) An increase in the interest rate should ________ the demand for dollars and the value of the
dollar, and net exports should ________.
A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) increase; increase
E) increase; not change
Answer: C
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5) The situation in which short-term interest rates are pushed to zero, leaving the central bank
unable to lower them further is known as
A) the Taylor rule.
B) a liquidity trap.
C) a zero-sum game.
D) an interest rate panic.
Answer: B
Topic: Quantitative Easing
Special Feature: Making the Connection: Too Low for Zero: Central Banks Try "Quantitative
Easing"
6) In response to already low interest rates doing little to stimulate the economy, the US Federal
Reserve began buying 10-year Treasury notes and certain mortgage-backed securities to keep
interest rates low. This policy is known as
A) inflation targeting.
B) contractionary monetary policy.
C) securities-bubble deflating.
D) quantitative easing.
Answer: D
Easing"
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7) By May 2009, bank reserves in the US had soared to more than US$900 billion. Which of the
following is not a reason partially explaining why banks were piling up excess reserves rather
than lending funds out?
A) The US Federal Reserve's decision to start paying interest of 0.25 percent on bank reserves
held as deposits held at the Federal Reserve.
B) The reduced demand for loans of households and firms who already faced damaged financial
positions due to the recession.
C) The reluctance of banks to make loans at low interest rates to households and firms with
financial positions damaged by the recession.
D) Liquidity traps leaving the central bank unable to lower short-term interest rates further to
spur on lending.
Answer: B
Easing"
8) From an initial long-run macroeconomic equilibrium, if the Bank of Canada anticipated that
next year aggregate demand would grow significantly slower than long-run aggregate supply,
then the Bank of Canada would most likely
A) decrease interest rates.
B) increase interest rates.
C) decrease income tax rates.
D) increase income tax rates.
Answer: A
Topic: The Effects of Monetary Policy on Real GDP and the Price Level
9) Expansionary monetary policy refers to the ________ to increase real GDP.

A) government's increasing spending and lowering taxes
B) government's decreasing spending and raising taxes
C) Bank of Canada's increasing the money supply and decreasing interest rates
D) Bank of Canada's decreasing the money supply and increasing interest rates
Answer: C
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Figure 11.4
10) Refer to Figure 11.4. In the figure above, if the economy is at point A, the appropriate
monetary policy by the Bank of Canada would be to
A) lower interest rates.
B) raise interest rates.
C) lower income taxes.
D) raise income taxes.
Answer: A
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Figure 11.5
11) Refer to Figure 11.5. Suppose the economy is in a recession and the Bank of Canada
pursues an expansionary monetary policy. Using the static AD-AS model in the figure above, this
would be depicted as a movement from
A) A to B.
B) B to C.
C) C to B.
D) A to E.
E) C to D.
Answer: A
12) Refer to Figure 11.5. Suppose the economy is in short-run equilibrium above potential GDP,
the unemployment rate is very low, and wages and prices are rising. Using the static AD-AS
model in the figure above, the correct Bank of Canada policy for this situation would be depicted
as a movement from
A) A to B.
B) B to C.
C) C to B.
D) A to E.
E) C to D.
Answer: C
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13) Refer to Figure 11.5. Suppose the Bank of Canada lowers its target for the overnight interest
rate. Using the static AD-AS model in the figure above, this situation would be depicted as a
movement from
A) A to B.
B) B to A.
C) C to B.
D) E to A.
E) C to D.
Answer: A
14) Refer to Figure 11.5. Suppose the Bank of Canada sells government of Canada bonds in
pursuit of contractionary monetary policy. Using the static AD-AS model in the figure above, this
situation would be depicted as a movement from
A) A to B.
B) B to D.
C) C to B.
D) B to C.
E) C to D.
Answer: C
15) Refer to Figure 11.5. Suppose the economy is in a recession and no policy is pursued. Using
the static AD-AS model in the figure above, this situation would be depicted as a movement from
A) A to B.
B) B to A.
C) C to B.
D) A to E.
E) C to D.
Answer: D
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16) Expansionary monetary policy to prevent real GDP from falling below potential real GDP
would cause the inflation rate to be relatively ________ and real GDP to be relatively ________.
A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower
Answer: A
17) Which of the following describes what the Bank of Canada would do to pursue an
expansionary monetary policy?
A) use open market operations to buy government of Canada bonds
B) use open market operations to sell government of Canada bonds
C) use discount policy to raise the discount rate
D) raise the reserve requirement
Answer: A
Special Feature: Don't Let This Happen to YOU!: Remember That with Monetary Policy, It's
the Interest Rates-Not the Money-That Counts
18) Contractionary monetary policy on the part of the Bank of Canada results in
A) an increase in the money supply, an increase in interest rates, and an increase in GDP.
B) a decrease in the money supply, an increase in interest rates, and a decrease in GDP.
C) an increase in the money supply, a decrease in interest rates, and an increase in GDP.
D) a decrease in the money supply, a decrease in interest rates, and a decrease in GDP.
Answer: B
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19) When the Bank of Canada uses contractionary policy

A) the price level rises higher than it would if the Fed did not pursue policy.
B) the price level rises less than it would if the Fed did not pursue policy.
C) it does not change the price level.
D) it causes inflation.
Answer: B
20) Which of the following would most likely induce the Bank of Canada to conduct
expansionary monetary policy? A significant decrease in
A) oil prices.
B) business taxes.
C) income tax rates.
D) investment spending.
Answer: D
21) The Bank of Canada promptly cut the interest rate at the beginning of the 2007-2009 global
financial crisis, even though the recession did not actually begin until some months later. Which
of the following is the rationale for this action?
A) The Bank of Canada inadvertently engaged in a procyclical policy as opposed to
countercyclical policy.
B) A new policy must be quickly implemented to do good.
C) Rising growth rates over time mean recessions are not as steep as time moves on.
D) Inaccurate Statistics Canada data was analyzed by the Bank of Canada's economists, which
showed the recession was already underway.
Answer: B
Topic: Can the Bank of Canada Eliminate Recessions?
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22) Which of the following is true about the Bank of Canada and its ability to prevent
recessions? The Bank of Canada
A) does not try to eliminate recessions, but instead focuses on preventing inflation.
B) can fine tune the economy and realistically hope to keep the economy from experiencing
recessions.
C) cannot realistically fine tune the economy, but seeks to keep recessions shorter and milder
than they would otherwise be.
D) cannot realistically fine tune the economy and has little to no effect on the magnitude and
length of recessions.
Answer: C
23) Your roommate is having trouble grasping how monetary policy works. Which of the
following explanations could you use to correctly describe the mechanism by which the Bank of
Canada can affect the economy through monetary policy? Increasing the money supply
A) lowers the interest rate, and firms increase investment spending.
B) causes people to spend more because they know prices will rise in the future.
C) raises the interest rate and consumers decrease spending on durable goods.
D) lowers the interest rate, raises the value of the dollar, lowers the prices of exports, and raises
net exports.
Answer: A
Topic: Monetary Policy and the Interest Rate
24) If the Bank of Canada raises or lowers interest rates too late, it could result in a ________
policy that destabilizes the economy.
A) fiscal
B) budgetary
C) procyclical
D) countercyclical
Answer: C
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25) Monetary policy could be procyclical if the Bank of Canada

A) is late recognizing that a recession has begun and conducts expansionary monetary policy.
B) is quick to recognize that a recession has begun and conducts expansionary monetary policy.
C) is late recognizing that a recession has begun and does not conduct expansionary monetary
policy.
D) is quick to recognize that a recession has begun and does not conduct expansionary monetary
policy.
Answer: A
26) The Bank of Canada may inadvertently engage in procyclical policy rather than
countercyclical policy due to
A) poor political planning.
B) shifts in the AD curve.
C) the global recession of 2007-2009.
D) a lag in gathering and analyzing the data, delaying when the Bank of Canada can recognize a
recession has begun.
Answer: D
Special Feature: Making the Connection: Trying to Hit a Moving Target: Making Policy with
"Real-Time Data"
27) Changes in interest rates affect all four components of aggregate demand.
Answer: FALSE
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28) Expansionary monetary policy refers to the Bank of Canada's increasing the money supply
and increasing interest rates to increase real GDP.
Answer: FALSE
29) When the Bank of Canada increases the money supply, people spend more because interest
rates fall.
Answer: TRUE
Topic: Monetary Policy and the Interest Rate
30) What actions should the Bank of Canada take if it believes the economy is about to fall into
recession?
Answer: If the Bank of Canada believes the economy is about to fall into recession, it should
conduct expansionary monetary policy, increasing the money supply and reducing interest rates.
In implementing expansionary monetary policy, the Bank of Canada could lower the discount
rate, lower the reserve requirement, and/or have the trading desk purchase government of Canada
securities.
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31) If the Bank of Canada orders a contractionary monetary policy, describe what will happen to
the following variables relative to what would have happened without the policy:
a. The money supply
b. Interest rates
c. Investment
d. Consumption
e. Net Exports
f. The aggregate demand curve
g. Real GDP
h. The price level
Answer:
a. The money supply decreases
b. Interest rates rise
c. Investment decreases
d. Consumption decreases
e. Net exports decrease
f. The aggregate demand curve shifts to the left
g. Real GDP falls
h. The price level falls
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32) Use a graph to show the effects of an expansionary monetary policy moving an economy out
of recession and to potential real GDP. Explain what happens to aggregate demand, real GDP,
and the price level.
Answer: If the economy is in recession, it is currently at point A, below potential real GDP. An
expansionary monetary policy will shift the aggregate demand curve to the right from AD1 to
AD2, increasing real GDP and the price level until it reaches potential real GDP at point B.

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11.4 Monetary Policy in the Dynamic Aggregate Demand and Aggregate Supply Model
Figure 11.6
1) Refer to Figure 11.6. In the dynamic model of AD-AS in the figure above, if the economy is at
point A in year 1 and is expected to go to point B in year 2, the Bank of Canada would most
likely
A) increase interest rates.
B) decrease interest rates.
C) not change interest rates.
D) decrease the inflation rate.
Answer: B
Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to
analyze monetary policy
2) Refer to Figure 11.6. In the dynamic model of AD-AS in the figure above, if the economy is at
point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues no
policy, then at point B
A) there is pressure on wages and prices to rise.
B) the unemployment rate is very, very low.
C) firms are operating above their normal capacity.
D) the economy is below full employment.
E) incomes and profits are rising.
Answer: D
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3) Refer to Figure 11.6. In the dynamic model of AD-AS in the figure above, the economy is at
point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues
policy. This will result in
A) unemployment rates higher than what would occur if no policy had been pursued.
B) inflation higher than what would occur if no policy had been pursued.
C) real GDP lower than what would occur if no policy had been pursued.
D) short-term interest rates higher than what would occur if no policy had been pursued.
Answer: B
Figure 11.7
4) Refer to Figure 11.7. In the dynamic AD-AS model, if the economy is at point A in year 1 and
is expected to go to point B in year 2, the Federal Reserve would most likely
A) increase interest rates.
B) decrease interest rates.
C) not change interest rates.
D) increase the inflation rate.
Answer: A
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5) Refer to Figure 11.7. In the dynamic AD-AS model, if the economy is at point A in year 1 and
is expected to go to point B in year 2, and the Federal Reserve pursues no policy, then at point B
A) firms are producing above capacity.
B) there is pressure on wages and prices to fall.
C) the unemployment rate is greater than the natural rate of unemployment.
D) incomes and profits are falling.
Answer: A
6) Refer to Figure 11.7. In the dynamic AD-AS model, the economy is at point A in year 1 and is
expected to go to point B in year 2, and the Federal Reserve pursues policy. This will result in
A) unemployment rates higher than what would occur if no policy had been pursued.
B) inflation rates higher than what would occur if no policy had been pursued.
C) potential real GDP levels lower than what would occur if no policy had been pursued.
D) real GDP levels higher than what would occur if no policy had been pursued.
Answer: A
7) From an initial long-run macroeconomic equilibrium, if the Bank of Canada anticipated that
next year aggregate demand would grow significantly faster than long-run aggregate supply, then
the Bank of Canada would most likely
A) increase income tax rates.
B) decrease income tax rates.
C) increase interest rates.
D) decrease interest rates.
Answer: C
Topic: Using Monetary Policy to Fight Inflation
550
8) Contractionary monetary policy to prevent real GDP from rising above potential real GDP
would cause the inflation rate to be ________ and real GDP to be ________.
A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower
Answer: D
Topic: Using Monetary Policy to Fight Inflation
Table 11.1
Year Potential Real GDP Real GDP Price Level
2019 $1.62 trillion $1.62 trillion 119
2020 1.66 trillion 1.65 trillion 121
9) Refer to Table 11.1. The hypothetical information in the table shows what the values for real
GDP and the price level will be in 2020 if the Bank of Canada does not use monetary policy.
Which of the following policies makes sense if the Bank of Canada wants to keep real GDP at its
potential level in 2020?
A) The Bank of Canada should sell government of Canada securities.
B) The Bank should lower the target for the overnight interest rate.
C) The Bank of Canada should pursue contractionary policy.
D) The Bank of Canada should lower capital gains taxes.
Answer: B
Special Feature: Solved Problem: The Effects of Monetary Policy
10) The dynamic aggregate demand and aggregate supply model accounts for the price level
rising every year.
Answer: TRUE
551
11) Expansionary monetary policy enacted during a recession will cause the inflation rate to
increase.
Answer: TRUE
12) In reality, the Bank of Canada is unable to use monetary policy to keep real GDP exactly at
its potential level.
Answer: TRUE
13) Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in
long-run macroeconomic equilibrium. For Year 2, graph aggregate demand, long-run aggregate
supply, and short-run aggregate supply such that the condition of the economy will induce the
Bank of Canada to conduct an expansionary monetary policy. Briefly explain the condition of
the economy and what the Bank of Canada is attempting to do.
Answer: The Bank of Canada conducts an expansionary monetary policy to increase real GDP
to potential real GDP. In the graph below, the economy would move from point A in Year 1 to
point B in Year 2 without any expansionary monetary policy. At point B, real GDP is below
potential real GDP. The Fed would increase the money supply and lower interest rates to
stimulate aggregate demand, trying to push the economy to reach potential real GDP.

552
Table 11.2
Year Potential Real GDP Real GDP Price Level
2010 $1.35 trillion $1.35 trillion 104
2011 1.40 trillion 1.44 trillion 110
14) Refer to Table 11.2. The hypothetical information in the table shows what the values for real
GDP and the price level will be in 2011 if the Federal Reserve does not use monetary policy:
a. If the Bank of Canada wants to keep real GDP at its potential level in 2011, should it use an
expansionary policy or a contractionary policy? Should the trading desk buy c bonds or sell
them?
b. Suppose the Bank of Canada's policy is successful in keeping real GDP at its potential level
in 2011. State whether each of the following will be higher or lower than if the Bank of Canada
had taken no action:
(i) Real GDP
(ii) Full-employment real GDP
(iii)The inflation rate
(iv) The unemployment rate
c. Draw an aggregate demand and aggregate supply graph to illustrate your answer. Be sure that
your graph contains LRAS curves for 2010 and 2011; SRAS curves 2010 and 2011; AD curve for
2010 and 2011, with and without monetary policy actions; and equilibrium real GDP and the
price level in 2011 with and without policy.
Answer:
a. The Bank of Canada should use contractionary monetary policy. It needs to sell Canada
bonds.
b. If the Bank of Canada's contractionary policy is successful, real GDP in 2011 will be lower
as will the inflation rate. Full-employment real GDP will not change and the unemployment rate
will rise.
c. The economy starts out in equilibrium in 2010 at point A. In 2011, with no contractionary
monetary policy, the economy will go to point B with real GDP above potential real GDP and the
price level at 150. Contractionary monetary policy will slow down the growth of aggregate
demand and the economy will reach equilibrium at point C.
553

554
15) Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in
long-run macroeconomic equilibrium. For Year 2, graph aggregate demand, long-run aggregate
supply, and short-run aggregate supply such that the condition of the economy will induce the
Bank of Canada to conduct a contractionary monetary policy. Briefly explain the condition of the
economy and what the Bank of Canada is attempting to do
Answer: The Bank of Canada conducts a contractionary monetary policy to reduce inflation. In
the graph below, the economy would move from point A in Year 1 to point B in Year 2 without
any contractionary monetary policy. At point B, inflation is higher than it would be if real GDP
equaled potential real GDP. The Bank of Canada would decrease the money supply and raise
interest rates to slow down aggregate demand, trying to keep the economy at potential.

555
16) Would the Bank of Canada respond more aggressively with interest rate cuts in a recession
caused by a decrease in spending, as in the 2008-2009 recession, than in a recession caused by an
increase in oil prices, as in the 1974-75 recession?
Answer: The inflation rate responds differently in the two recessions. A large increase in oil
prices decreases real GDP (or slows down the growth rate), but increases inflation. The large
decrease in spending decreases real GDP and decreases inflation. The Bank of Canada wants to
increase real GDP, but they also want to prevent an increase in inflation. Cutting interest rates
increases aggregate demand which increases real GDP and increases inflation. With a recession
caused by a drop in spending, the rate of inflation declines, which allows the Bank of Canada to
more aggressively cut interest rates.
11.5 A Closer Look at the Bank of Canada's Setting of Monetary Policy Targets
1) Under the monetary growth rule proposed by the monetarists, the money supply would grow
each year at a constant rate equal to the long-run rate of growth of
A) inflation.
B) real GDP.
C) interest rates.
D) employment.
Answer: B
Topic: Monetary Growth
Learning Outcome: 11.5 Discuss the Bank of Canada’s setting of monetary policy targets
2) Monetarists think that the Bank of Canada should use ________ as a target when conducting
monetary policy.
A) the money supply
B) the overnight interest rate
C) the Treasury bill rate
D) the inflation rate
E) the unemployment rate
Answer: A
556
3) With a monetary growth rule as proposed by the monetarists, during a recession the rate of
growth of the money supply would
A) decrease.
B) increase.
C) not change.
D) decrease or increase depending on economic conditions.
Answer: C
4) The supporters of a monetary growth rule believe that active monetary policy
A) stabilizes the economy, decreasing the number of recessions and their severity.
B) destabilizes the economy, increasing the number of recessions and their severity.
C) cannot change the inflation rate.
D) cannot change real GDP.
Answer: B
5) Most of the pressure for a monetary growth rule has disappeared because since 1980
A) the relationship between movements in the money supply and movements in real GDP and
the price level have become much stronger.
B) the relationship between movements in the money supply and movements in real GDP and
the price level have become much weaker.
C) the relationship between movements in interest rates and movements in real GDP and the
price level have become much stronger.
D) the relationship between movements in interest rates and movements in real GDP and the
price level have become much weaker.
Answer: B
557
6) Most economists believe that the best monetary policy target is

A) an interest rate.
B) the money supply.
C) total bank reserves.
D) the discount rate.
Answer: A
7) The Bank of Canada cannot target both the money supply and the interest rate because it does
not control
A) bank reserves.
B) money demand.
C) the discount rate.
D) open market operations.
Answer: B
8) If the Bank of Canada targets the money supply, and the money demand curve shifts to the
left, then the Bank of Canada
A) cannot maintain the money supply target.
B) can maintain the money supply target, but at a lower interest rate.
C) can maintain the money supply target, but at a higher interest rate.
D) can maintain the money supply target with no change in the interest rate.
Answer: B
558
9) If the Bank of Canada targets the interest rate and the money demand curve shifts to the left,
then the Bank of Canada
A) cannot maintain the interest rate target.
B) can maintain the interest rate target, but at a lower quantity of the money supply.
C) can maintain the interest rate target, but at a higher quantity of the money supply.
D) can maintain the interest rate target with no change in the money supply.
Answer: B
10) The Bank of Canada does not target both the money supply and an interest rate because
A) it would be too confusing to Bay Street and would disrupt the financial markets.
B) it would be too easy for Bay Street to determine what policy the Bank of Canada is following
and this would destabilize the economy.
C) it would be illegal according to the Bank Act.
D) the Bank of Canada cannot achieve a target for both the money supply and an interest rate at
the same time.
Answer: D
11) The Taylor rule links the Bank of Canada's target for the
A) money supply to shifts in money demand.
B) money supply to changes in interest rates.
C) overnight interest rate to economic variables.
D) overnight interest rate to the money supply.
Answer: C
Topic: The Taylor Rule
559
12) The Bank of Canada adheres to the ideas expressed by ________. If the economy moves into
a recession, the Bank of Canada would recommend that the overnight lending rate decrease as
long as the inflation rate did not rise above the publicly announced goal for inflation
A) the gold standard
B) the monetarist school of thought
C) flexible inflation targeting
D) the Taylor Rule
Answer: C
Topic: Inflation Targeting
13) Using the Taylor rule, if the current inflation rate equals the target inflation rate and real
GDP equals potential GDP, then the overnight interest rate target rate equals the
A) current discount rate.
B) current inflation rate.
C) real equilibrium federal funds rate.
D) current inflation rate plus the real equilibrium overnight interest rate.
Answer: D
14) Using the Taylor rule, if the current inflation rate exceeds the target inflation rate and real
GDP exceeds potential GDP, then the overnight interest target rate ________ the sum of the
current inflation rate plus the real equilibrium overnight interest rate.
A) will be greater than
B) will be less than
C) will be the same as
D) may be greater than or less than
Answer: A
560
15) Using the Taylor rule, if the current inflation rate equals the target inflation rate and real
GDP is less than potential GDP, then the overnight interest target rate ________ the sum of the
current inflation rate plus the real equilibrium overnight interest rate.
A) will be greater than
B) will be less than
C) will be the same as
D) may be greater than or less than
Answer: B
16) Suppose the equilibrium real overnight interest rate is 2 percent, the target rate of inflation is
2 percent, the current inflation rate is 4 percent, and real GDP is 2 percent above potential real
GDP. If the weights for the inflation gap and the output gap are both 1/2, then according to the
Taylor rule the federal funds target rate equals
A) 4 percent.
B) 6 percent.
C) 8 percent.
D) 10 percent.
Answer: C
17) Inflation targeting refers to conducting ________ policy so as to commit the central bank to
achieving a ________.
A) fiscal; publicly announced level of inflation
B) fiscal; zero inflation rate
C) monetary; publicly announced level of inflation
D) monetary; zero inflation rate
Answer: C
561
18) Which of the following statements about inflation targeting is true?

A) Inflation targeting would not allow the central bank the flexibility to take action against a
severe recession.
B) Inflation targeting has been adopted by the central banks of fewer than five countries.
C) With changes in leadership over time at the Bank of Canada, inflation targeting could help
institutionalize good Canadian monetary policy.
D) Inflation targeting is practiced strongly in Canada but is ignored in Europe.
Answer: C
19) Which of the following statements about inflation targeting is true?

A) Inflation targeting by the central banks in other countries has not typically lowered inflation.
B) Inflation targeting would not reduce the flexibility of monetary policy to address other policy
goals.
C) Inflation targeting would not allow the central bank the flexibility to take action against a
severe recession.
D) Inflation targeting would make it easier for households and firms to form accurate
expectations of future inflation, improving their planning and the efficiency of the economy.
Answer: D
20) In the countries that have adopted inflation targeting, the inflation rate has typically
A) increased.
B) decreased.
C) decreased to zero.
D) not changed.
Answer: B
562
21) The Bank of Canada uses ________ to measure inflation.

A) the index of leading economic indicators
B) the personal consumption expenditures index
C) the consumer price index
D) the GDP deflator
E) the producer price index
Answer: C
Topic: Measuring Inflation
Special Feature: Making the Connection: How Does the Bank of Canada?
22) The Bank of Canada uses a "core" price index, one that excludes food and energy prices to
measure inflation. It does so because
A) food and energy are inelastic goods and consumers will buy them regardless of their price.
B) it wants to avoid the blame for high gasoline prices causing inflation.
C) food and energy prices have wide swings that are not related to the causes of general inflation.
D) food and energy prices do not change all that much during the short run, so are irrelevant to
the calculation of inflation.
Answer: C
Topic: Measuring Inflation
Special Feature: Making the Connection: How Does the Bank of Canada?
23) The relationship between GDP and the money supply has gotten stronger since the 1980s.
Answer: FALSE
24) The Bank of Canada has adopted an interest rate target for most of the time since World
War II.
Answer: TRUE
563
25) Canada's banking regulator, the Office of the Superintendent of Financial Institutions
(OSFI), has been more conservative than banking regulators in other countries, which is
attributed to the lower leverage of Canadian banks and is one reason why Canada did not have a
housing bubble and banking crisis in 2008.
Answer: TRUE
Topic: Bank Balance Sheets
26) Using the money demand and money supply model, show and explain why the Bank of
Canada cannot achieve a target for both the money supply and an interest rate.
Answer: The Bank of Canada does not control money demand, so it can not achieve a target for
both the money supply and an interest rate. In the graph below, the Bank of Canada could
achieve an interest rate of 4 percent or a money supply of $90 billion. It appears that since the
money market is in equilibrium at point A with an interest rate of 4 percent and the money supply
of $90 billion that the Bank of Canada can achieve both targets. If money demand shifts,
however, the Bank of Canada must choose whether to maintain the interest rate target of 4
percent or the money supply target of $90 billion.

564
27) Consider the Taylor rule for the target of the overnight interest rate. Suppose the equilibrium
real overnight interest rate is 2 percent, the target rate of inflation is 3 percent, the current
inflation rate is 3 percent, real GDP equals potential real GDP, and the weights are 1/2 for the
inflation gap and the output gap. Using the Taylor rule, what does the target for the overnight
interest rate equal? Next, if the Bank of Canada lowered the target for the inflation rate to 1
percent, how much would the target for the overnight interest rate change?
Answer: The interest target rate would equal 5 percent. With no inflation gap or output gap, the
interest target rate equals the current inflation rate plus the equilibrium real overnight interest
rate. A decrease in the inflation target from 3 percent to 1 percent with a weight on the inflation
gap of 1/2 would raise the federal funds target rate by 1 percentage point, from 5 percent to 6
percent.
28) In the Taylor rule, does the target for the overnight interest rate respond differently for a
recession caused by a decrease in aggregate demand and for a recession caused by a decrease in
short-run aggregate supply? Explain whether there is or is not a difference in how the target for
the overnight interest rate changes.
Answer: The target for the overnight interest rate responds differently. The output gap is
negative with both recessions, but the current inflation rate and the inflation gap differ. The
decrease in short-run aggregate supply will increase current inflation and the inflation gap
(current inflation rate minus the target inflation rate). The decrease in aggregate demand will
decrease both current inflation and the inflation gap. The target for the overnight interest rate will
be higher for the recession caused by a decrease in short-run aggregate supply.
565
29) According to the Taylor rule, does the target for the overnight interest rate respond
differently for an increase in inflation caused by an increase in aggregate demand and for an
increase in inflation caused by a decrease in short-run aggregate supply? Explain whether there is
or is not a difference in how the target for the overnight interest rate changes.
Answer: The target for the overnight interest rate responds differently. The current inflation rate
and the inflation gap are the same in both cases, but the output gap differs. The output gap
(percentage difference between real GDP and potential real GDP) will be positive for the
inflation caused by an increase in aggregate demand, but negative for the inflation caused by a
decrease in short-run aggregate supply. The target for the overnight interest rate will be higher in
the case of the increase in inflation caused by an increase in aggregate demand.
11.6 Central Bank Policies during the 2007-2009 Global Financial Crisis
1) The U.S. Federal Reserve cut the target for the U.S. overnight interest rate seven times
between September 2007 and March 2008. What event led the U.S. Federal Reserve to make
these reductions in the U.S. overnight interest rate rate?
A) It was in response to reductions in the discount rate, which was also lowered seven times over
the same time period.
B) The chairman of the Federal Reserve System persuaded members of the Federal Open Market
Committee to lower interest rates in order to reduce the price of oil in international markets.
C) During this period there was a substantial reduction in the demand for housing.
D) Several large investment banks failed during this time period.
Answer: C
Topic: The Housing Market Bubble
Learning Outcome: 11.6 Discuss the policies central banks used during the 2007–2009 global
financial crisis
566
2) When housing prices fall, as they do after a housing market bubble, consumption spending on
furniture, appliances, and home improvements ________ as many households found it ________
to borrow against the value of their homes.
A) declined; easier
B) declined; harder
C) increased; easier
D) increased; harder
Answer: B
financial crisis
3) When housing prices fall, as they do after a housing market bubble, most banks and other
lenders ________ the requirement for borrowers, making it ________ for potential home buyers
to obtain mortgages.
A) tighten; easier
B) tighten; harder
C) ease; easier
D) ease; harder
Answer: B
financial crisis
4) A financial asset is considered a security if

A) the owner of the security receives dividends and realizes a capital gain when the asset is sold.
B) it can be sold in a secondary market.
C) its value increases after it is sold in a primary market.
D) its value is secure; that is, the owner will not suffer a financial loss when the asset is sold.
Answer: B
Topic: The Mortgage Market
financial crisis
567
5) Which of the following explains why mortgages weren't considered securities in the United
States prior to 1970?
A) The Federal Reserve Act of 1913 prohibited mortgages from being considered securities. An
amendment to the Act was approved in 1970 that allowed mortgages to be considered securities.
B) Until 1970, the average annual increase in housing prices did not allow the buying and selling
of mortgages to be profitable. There has been a significant annual increase in housing prices and
mortgage values since 1970.
C) Congress passed a law in 1970 stipulating that mortgages could be classified as securities.
D) Prior to 1970, mortgages were rarely resold in the secondary market.
Answer: D
financial crisis
6) To reassure investors who were unwilling to buy mortgages in the secondary market, the U.S.
Congress used two government sponsored enterprises, Fannie Mae and Freddie Mac, to stand
between investors and banks that grant mortgages. Fannie Mae and Freddie Mac
A) sell mortgages to investors and use the funds to purchase bonds from banks.
B) sell bonds to investors and use the funds to purchase mortgages from banks.
C) sell bonds to banks and use the funds to purchase mortgages from investors.
D) sell mortgages to banks and use the funds to purchase bonds from investors.
Answer: B
financial crisis
7) By the 2000s, an important change in the US mortgage market had occurred when ________
became significant participants in the secondary market for mortgages.
A) investment banks
B) Federal Reserve Banks
C) commercial banks
D) savings banks
Answer: A
Topic: The Role of Investment Banks
financial crisis
568
8) By the height of the US housing bubble in 2005 and early 2006, lenders had greatly loosened
the standards for obtaining a mortgage loan, with many mortgages being granted to ________
borrowers with flawed credit histories and ________ borrowers who did not document their
incomes.
A) sub-prime; "Alt-A"
B) adjustable rate; shadow-banking
C) "credit crunch"; black market
D) "fresh-start"; prime rate
Answer: A
Topic: The Role of Investment Banks
financial crisis
9) The US Federal Reserve responded to the 2008 financial crisis in several ways. Which of the
following is not one of the ways the Fed responded?
A) The Fed made investment banks eligible for discount loans.
B) The Fed lent investment banks Treasury securities in exchange for mortgage-backed
securities.
C) The Fed lowered the required reserve ratio on demand deposit accounts in order to increase
the amount of bank reserves.
D) The Fed helped JP Morgan to acquire Bear Stearns, a nearly bankrupt investment bank.
Answer: C
Topic: Central Bank Policies during the Financial Crisis
financial crisis
10) Although the US Federal Reserve had traditionally made discount loans only to commercial
banks, in response to to the financial crisis in 2008 the Fed made ________ eligible for discount
loans as well.
A) the Treasury Department
B) mortgage brokers
C) savings banks
D) primary dealers
Answer: D
financial crisis
569
11) Firms that participate in regular open market transactions with the US Federal Reserve are
called
A) secondary market banks.
B) Treasury banks.
C) primary dealers.
D) Federal Reserve partners.
Answer: C
financial crisis
12) In 2008, the US Treasury and the US Federal Reserve took action to save large financial
firms such as Bear Stearns and AIG from failing. Which of the following is one reason why these
measures were taken?
A) The Emergency Economic Stabilization Act required the Fed and the Treasury to provide
financial assistance to firms that participated in regular open market actions with the Fed.
B) The bankruptcy of a large financial firm would force the firm to sell its holdings of securities,
which could cause other firms that hold these securities to also fail.
C) The Fed and the Treasury wanted to allow Freddie Mac and Fannie Mae more time to buy the
firms before they went bankrupt.
D) The failure of these firms would have forced the Fed to increase interest rates, which could
have led to a severe recession.
Answer: B
financial crisis
570
13) While many analysts defended the actions taken by the US Federal Reserve and the US
Treasury to respond to the financial crisis in 2008, others were critical of these actions. The
critics were concerned that by not allowing large firms to fail
A) smaller firms will resent not receiving similar assistance.
B) stockholders and bondholders of these firms were not allowed to receive the proceeds from
the sale of assets that would have occurred if the firms had declared bankruptcy.
C) there is an increased likelihood that other firms will engage in risky behavior in the future
with the expectation that they will also not be allowed to fail.
D) there will be less competition in the U.S. economy, which could led to higher prices for
consumers.
Answer: C
financial crisis
14) In October 2008, the US Congress passed the ________, under which the US Treasury
provided funds to banks in exchange for stock.
A) Bank Rescue Alliance Treaty (BRAT)
B) Mortgage Transfer Agency (MTA)
C) Troubled Asset Relief Program (TARP)
D) Financial Assurance Association (FAA)
Answer: C
financial crisis
15) If the amount you owe on your house is greater than the price of the house, you have
A) no value to your house.
B) a mortgage rate that is too high.
C) negative equity in your house.
D) a reverse mortgage on your house.
Answer: C
Topic: Leverage
financial crisis
Special Feature: Making the Connection: The Wonderful World of Leverage
571
16) The larger the fraction of an investment financed by borrowing

A) the greater the potential return and potential loss on that investment.
B) the smaller the potential return and potential loss on that investment.
C) the greater the potential return and the smaller the potential loss on that investment.
D) the smaller the potential return and the greater the potential loss on that investment.
Answer: A
Topic: Leverage
financial crisis
17) Low interest rates that resulted from the Bank of Canada's response to the global financial
crisis have caused Canadian household debt to disposable income ratio to ________ causing the
likelihood of a housing bubble to ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: A
Topic: Monetary Policy and Recessions
financial crisis
Special Feature: An Inside LOOK at Policy: The Bank of Canada's response to a Developing
Housing Price Bubble.
18) A borrower defaults on a loan when he stops making payments on the loan.
Answer: TRUE
financial crisis
19) Canadian banks are regulated by the Bank of Canada.

Answer: FALSE
financial crisis
572
20) With the Troubled Asset Relief Program (TARP), the US Treasury provided funds to banks
in exchange for stock.
Answer: TRUE
financial crisis
21) Mortgage lenders often resell mortgages in secondary markets. How might this make lenders
act differently than if they intended to hold the mortgages themselves?
Answer: Lenders would be more likely to grant mortgages if they intended to resell the
mortgages than if they intended to hold them. Reselling reduces the risk of granting mortgages
because lenders no longer need to worry that borrowers will default on their mortgage loans.
financial crisis
573
22) In the following table, fill in the columns for your return on investment if the price of your
house increased or decreased by 20 percent, based on the down payments specified in the first
column.
Return on Your Investment From
A 20 Percent A 20 Percent
Increase in the Price Decrease in the Price
Down Payment of Your House of Your House
100%
20
10
5
Answer: Return on Your Investment From

A 20 Percent A 20 Percent
Increase in the Price Decrease in the Price
Down Payment of Your House of Your House
100% 20% -20%
20 100 -100
10 200 -200
5 400 -400

Topic: Leverage
financial crisis
574
23) Beginning in 2008, the US Federal Reserve and the U.S. Treasury Department responded to
the financial crisis by intervening in financial markets in unprecedented ways. Briefly summarize
the actions of the US Fed and the US Treasury.
Answer: Among the actions taken by the Fed and Treasury were: (1) In March 2008, the Fed
announced the Primary Dealer Credit Facility, under which primary dealers — firms that
participate in open market operations with the Fed — are eligible for discount loans. (2) Also in
March, the Fed announced the Term Securities Lending Facility under which the Fed will loan
up to $200 billion of Treasury securities in exchange for mortgage-backed securities. (3) The Fed
and the Treasury took direct action to keep large financial institutions from bankruptcy. In March
2008, they helped JP Morgan Chase acquire the investment bank Bear Stearns. The Fed agreed
that if JP Morgan Chase acquired Bear Stearns, the Fed would guarantee any losses JP Morgan
Chase suffered on Bear Stearns holdings of mortgage-backed securities, up to $29 billion. (4) In
September the Treasury moved to have the federal government take control of Fannie Mae and
Freddie Mac. Fannie Mae and Freddie Mac were each provided with up to $100 billion in
exchange for 80 percent ownership of the firms. (5) In September, the Fed agreed to provide an
$85 billion loan to the American International Group (AIG) insurance company in exchange for
an 80 percent ownership stake, effectively giving the federal government control of the
company. (6) In September, the Treasury announced a plan to provide insurance for deposits in
money market mutual funds, similar to the existing insurance on bank deposits. (7) Also in
September, the Fed announced that it would lend directly to corporations through the
Commercial Paper Funding Facility by purchasing three-month commercial paper issued by
non-financial corporations. (8) In October, Congress passed the Troubled Asset Relief Program
(TARP), under which the Treasury attempted to stabilize the commercial banking system by
providing funds to banks in exchange for stock.
financial crisis
575

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Macroeconomics Canadian 1st Edition Hubbard Test Bank

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Macroeconomics, Canadian Ed. (Hubbard et al.

11.1 What Is Monetary Policy?

3) Monetary policy refers to the actions the

4) The Bank of Canada system's four monetary policy goals are

12) List the Bank of Canada's four main monetary goals.

3) The money demand curve has a

4) An increase in the interest rate

5) An increase in the interest rate causes

6) An increase in the price level causes

14) An increase in real GDP can shift

17) An increase in the demand for government of Canada securities will

18) Which of the following is true?

24) Changes in the overnight interest rate usually result in

Diff: 3 Type: ES Page Ref: 330-331

Diff: 3 Type: ES Page Ref: 330

Diff: 2 Type: ES Page Ref: 330

11.3 Monetary Policy and Economic Activity

2) An increase in interest rates

9) Expansionary monetary policy refers to the ________ to increase real GDP.

19) When the Bank of Canada uses contractionary policy

25) Monetary policy could be procyclical if the Bank of Canada

Diff: 2 Type: ES Page Ref: 334-335

Diff: 2 Type: ES Page Ref: 339-340

Diff: 3 Type: ES Page Ref: 341-342

Diff: 2 Type: ES Page Ref: 339-341

6) Most economists believe that the best monetary policy target is

18) Which of the following statements about inflation targeting is true?

19) Which of the following statements about inflation targeting is true?

21) The Bank of Canada uses ________ to measure inflation.

Diff: 2 Type: ES Page Ref: 343

4) A financial asset is considered a security if

16) The larger the fraction of an investment financed by borrowing

19) Canadian banks are regulated by the Bank of Canada.

Answer: Return on Your Investment From

Diff: 3 Type: ES Page Ref: 349-350

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