Question 1

What is the primary objective of the Bank of Canada’s monetary policy as stated in the Bank of Canada Act of 1935?

Accepted Answer

To control the quantity of money and interest rates to avoid inflation and, when possible, prevent excessive swings in real GDP growth and unemployment

Question 2

According to the 2021 agreement between the Government of Canada and the Bank of Canada, what is the current inflation target?

Accepted Answer

A 2 percent midpoint of a 1 to 3 percent inflation-control range, measured by the 12-month rate of change in the total CPI

Question 3

Which of the following best describes the Bank of Canada’s operational guide for predicting future inflation?

Accepted Answer

The core inflation rate

Question 4

What is one major benefit of adopting an inflation-control target, according to the study materials?

Accepted Answer

It anchors expectations about future inflation, reducing surprises for savers and investors

Question 5

Critics of inflation targeting argue that focusing on inflation might:

Accepted Answer

Permit the unemployment rate to rise or real GDP growth to slow

Question 6

Which of the following is NOT a monetary policy instrument used by the Bank of Canada?

Accepted Answer

The federal budget deficit

Question 7

How does the Bank of Canada change the quantity of bank reserves?

Accepted Answer

By conducting open market operations—buying or selling government securities

Question 8

In the corridor system, what prevents the overnight rate from rising above the bank rate?

Accepted Answer

Banks can always borrow from the Bank of Canada at the bank rate

Question 9

Suppose the Bank of Canada wants to fight inflation. Which sequence of events is most likely to occur?

Accepted Answer

The Bank raises the overnight rate, decreases reserves, and aggregate demand falls

Question 10

Which formula correctly expresses the long-term real interest rate?

Accepted Answer

$$r = i - \pi^e$$

Question 11

If the Bank of Canada lowers the overnight rate, what is the expected effect on the Canadian dollar in the foreign exchange market, all else equal?

Accepted Answer

The Canadian dollar will depreciate

Question 12

During the COVID-19 pandemic, the Bank of Canada switched to which type of monetary policy operation?

Accepted Answer

Quantitative easing (QE)

Question 13

Which of the following best describes macroprudential regulation?

Accepted Answer

Regulation focused on the interconnections among financial institutions and their shared exposure to shocks

Question 14

Which institution is responsible for insuring deposits in Canadian banks?

Accepted Answer

The Canada Deposit Insurance Corporation

Question 15

In the long run, what is the effect of monetary policy on the unemployment rate?

Accepted Answer

It has no effect on the unemployment rate, which is determined by the natural rate

Question 16

Which of the following is a possible consequence of a widespread fall in asset prices for banks?

Accepted Answer

Banks suffer a capital loss, and if large enough, may become insolvent

Question 17

If the Bank of Canada raises the overnight rate, which of the following is most likely to occur in the loanable funds market?

Accepted Answer

The supply of loanable funds decreases and the real interest rate rises

Question 18

Which of the following best describes the transmission mechanism when the Bank of Canada lowers the overnight rate?

Accepted Answer

Aggregate demand increases, real GDP rises, and inflation increases

Question 19

Which of the following is a key difference between the corridor system and the floor system for monetary policy operations?

Accepted Answer

The floor system keeps the overnight rate at the floor of the operating band by supplying ample reserves

Chapter 14: Monetary Policy in Canada

Study Guide - Practice Questions

Study Guide - Flashcards