1.

Commercial banks create money by:

A. printing them.
B. keeping a fraction of deposits as reserves and lending the rest.
C. they do not, only the central bank can create money.
D. none of the above.

2. What is the role of a commercial bank?

A. To maximize profits for its shareholders

B. To take customers’ deposits and make loans
C. To create money through the banking system
D. All the answers are correct

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

A. Provider of monetary base

B. Earns profits for the federal government of Canada
C. A lender of last resort
D. Issues legal tender

4. Which of the following statements is (are) CORRECT?

A. The higher the cash withdrawals by customers, the lower is the deposit creation
B. The Bank of Canada cannot fully control the reserve ratio and the currency ratio
C. The higher the reserve ratio, the lower is the deposit creation
D. All the answers are correct

5. The Bank of Canada has been cutting its target overnight interest rates since late 2008 due

to the recent financial crisis. The lowest effective value of the target overnight interest rate

is equal to

A. 0.5%
B. 0%
C. 0.25%
D. 0.75%

[ onr- 0.25%, onr + 0.25%]

6. If the Bank of Canada sells $10 million worth of government securities in the open market,

and if the reserve ratio is 0.25, what is the resulting change in the money supply?

A. A decrease of $40 million

B. A decrease of $2.5 million
C. An increase of $2.5 million
D. An increase of $40 million

 the MB decreases by 10 million $

The change in MS= the change in MB * money multiplier

Money multiplier = 1/ rr= 1/ 0.25 = 4

The change in MS= (-10) * 4 = -40 million $

7. In the short-run macro model, an open market purchase of bonds by the central bank will

A. raise the interest rate, reduce spending, and increase output.

B. raise the interest rate, reduce spending, and decrease output.
C. lower the interest rate, reduce spending, and decrease output.
D. lower the interest rate, increase spending, and increase output.

8. On average, workers prefer to be paid twice a month rather than once a month. Which of the

following explain(s) this observation?

A. Discounting
B. The precautionary motive for holding money
C. The transaction motive for holding money
D. All of the answers are correct

9. Why does a future payment of money have to be discounted at the present?

A. People are impatient

B. Future inflation rates may be higher and thus erode the purchasing power of money
C. If money were to be paid now, we can earn interest income from it
D. All the answers are correct

10. Households and businesses often hold some of their wealth as non-interest earning money

balances because

A. Money balances offer a better protection against rising prices than do many other assets
B. Money balances always pay lower rates of return than the non-money assets
C. The opportunity cost of holding money balances is lower than that of other assets
D. Money balances provide convenience and lower risk than many other assets

11. Why is the Bank of Canada unable to control both the overnight interest rate (ONR) and

the money supply simultaneously?

A. If it sets a particular ONR, it has to let money demand determine the size of the money supply
B. If it sets a particular money supply, it has to let money demand determine the size of the ONR
C. If it desires a high ONR, the corresponding money supply must fall
D. All of the answers are correct
 12. Which of the following is NOT a monetary policy operating technique in Canada?

A. Changing the required reserve ratio of the commercial banks

B. Announcing and defending the target overnight interest rate
C. Switching government deposits between the Bank of Canada and the commercial banks
D. Buying and selling government bonds in the open market

13. To have long term effects on the economy, monetary and fiscal policies must

A. Alter SRAS curve.

B. Alter AD.
C. Affect the level of potential output.
D. Smooth fluctuations in economic activity over business cycles.

14. Why does a future payment of money have to be discounted at the present?

A. People are impatient

B. Future inflation rates may be higher and thus erode the purchasing power of money
C. If money were to be paid now, we can earn interest income from it
D. All of the answers are correct

15. If the Bank of Canada follows the Taylor rule, it reacts to a recessionary gap by _decrease_interest
rates, then aggregate expenditure will _increase_____, aggregate demand will _increase_____, and
short-run equilibrium output will__increase_____.

A. Decreasing; increase; increase; increase

B. Increasing; decrease; decrease; decrease
C. Increasing; increase; increase; decrease
D. Decreasing; increase; decrease; decrease

16. Which of the following statements is (are) CORRECT regarding the target overnight rates set by

the Bank of Canada (BOC)?

A. The Bank rate is always higher than the target overnight rate.
B. The lowest possible target overnight interest rate that the BOC can set is zero.
C. The operating band is always plus-minus one-half of one percentage point from the target
overnight rate.
D. Canadian laws dictate that when the BOC cuts or raises the target overnight rate, the
commercial banks have to do the same with their mortgage and deposit rates.
17. A newspaper headline reads: "The Bank of Canada Reduces the Target Overnight Rate for a Second

Time This Year." This headline indicates that the Bank of Canada is most likely trying to:

A. Stimulate the economy.

B. Decrease the money supply.
C. Keep the bank rate constant.
D. Reduce inflationary pressures in the economy.

18. The US Federal Reserve (the Fed) has been scaling back its quantitative easing by cutting down the

amount of bonds it purchases from the money markets. This means that US interest rates are going

to ____ in the near future. Therefore, the Feds must believe that ______.

A. Rise; the US inflation rate has been falling.

B. Fall; the US inflation rate has been negative.
C. Rise; the US economy has been strengthening.
D. Fall; the US economy has been weakening.

It will decrease the MS in the economy

 Interest rate will rise in the economy  Y decreases

19. Suppose the Bank of Canada conducts its monetary policies by following the equation i = i0+γ(π-π∗),

where i stands for interest rate, π stands for inflation rate, and γ is a positive parameter. Then, we

can deduce that:

A. i is equal to i0, if π is less than π∗.

B. i is less than i0, if π is greater than π∗.
C. i is greater than i0, if π is equal to π∗.
D. i is greater than i0, if π is greater than π∗.

20. During the 2008-2009 financial crisis, which of the following policies was NOT adopted by

central banks in North America and Europe?

A. ”Quantitative easing” by the central banks

B. Raising target overnight interest rates
C. Open market purchases of bonds by the central banks
D. Conducting SRAs to defend the target overnight interest rates