Question 1

Which of the following best describes the primary function of money as a medium of exchange?

Accepted Answer

It solves the barter problem of the double coincidence of wants by providing a universally accepted means of payment.

Question 2

A bond issued by the TransCanada Railroad Company promises to pay $1000 in the future and regular interest payments. What is the main reason someone might choose to hold money instead of this bond?

Accepted Answer

Money is more liquid and can be used immediately for transactions.

Question 3

In the loanable funds market, which group is considered the supplier of funds?

Accepted Answer

Savers who deposit funds in bank accounts or buy bonds.

Question 4

Refer to the downward-sloping demand curve labeled 'D = Investment.' What does this curve represent in the loanable funds market?

Accepted Answer

The relationship between interest rates and the quantity of loanable funds demanded for investment.

Question 5

If the Bank of Canada lowers the deposit rate from 2.75% to 2.25%, what is the likely effect on the overnight rate?

Accepted Answer

The overnight rate will fall toward the new deposit rate, establishing a lower bound.

Question 6

Which of the following is NOT a function of the Bank of Canada?

Accepted Answer

Setting fiscal policy for the federal government.

Question 7

What is the opportunity cost of holding money instead of bonds?

Accepted Answer

The interest income forgone by not holding bonds.

Question 8

Which type of money is described as government-issued currency with no alternative uses, valuable simply by government decree?

Accepted Answer

Fiat money.

Question 9

If the Bank of Canada wants to correct an inflationary gap, which monetary policy action should it take?

Accepted Answer

Raise interest rates to decrease aggregate demand.

Question 10

Suppose the interest rate rises. What happens to the quantity of money supplied by commercial banks?

Accepted Answer

It increases because banks loan more and create more demand deposits.

Question 11

Which formula best represents the components of aggregate demand affected by monetary policy?

Accepted Answer

$$AD = C + I + G + X - IM$$

Question 12

If the Bank of Canada lowers interest rates, what is the expected effect on the Canadian dollar (C$) and net exports?

Accepted Answer

C$ depreciates and net exports increase.

Question 13

Which of the following best describes the arbitrage process in the overnight market?

Accepted Answer

Banks move funds between the Bank of Canada and the overnight market to profit from differences in interest rates.

Question 14

Which monetary policy tool is used by the Bank of Canada to influence short-term interest rates?

Accepted Answer

The overnight rate.

Question 15

If the Bank of Canada raises the policy rate by 0.5%, what happens to the deposit rate and the bank rate?

Accepted Answer

Both rates are raised by 0.5%.

Question 16

Which of the following is included in M1+ in Canada?

Accepted Answer

Currency in circulation plus demand deposits.

Question 17

What is the main goal of the Bank of Canada’s inflation-control target?

Accepted Answer

To maintain an annual inflation rate between 1% and 3%, aiming for the 2% midpoint.

Question 18

Which of the following best describes the effect of expansionary monetary policy?

Accepted Answer

Interest rates fall, aggregate demand rises, unemployment decreases.

Question 19

A commercial bank makes a loan to a customer. What happens to the money supply?

Accepted Answer

The money supply increases because a demand deposit is created.

Question 20

Which of the following best describes the relationship between interest rates and saving in the loanable funds market?

Accepted Answer

As interest rates rise, the quantity of savings supplied increases.

Chapter 12 for final exam studying

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