Question 1

Which of the following best describes the three main functions of money in an economy?

Accepted Answer

Medium of exchange, unit of account, and store of value

Question 2

Suppose the market interest rate increases from 5% to 10%. What happens to the price of a perpetuity bond that pays $100 per year?

Accepted Answer

The price falls from $$2000 to 1000$$

Question 3

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

Accepted Answer

The interest that could have been earned on bonds

Question 4

If the Bank of Canada wants to decrease aggregate demand to fight inflation, which policy action is most appropriate?

Accepted Answer

Raise the policy interest rate

Question 5

Which formula correctly calculates the present value (price) of a bond that pays a coupon of $$C in n$ years at an interest rate r$?

Accepted Answer

$$\frac{C}{(1 + r)^n}$$

Question 6

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

Accepted Answer

Setting fiscal policy

Question 7

If the Bank of Canada lowers the deposit rate and the bank rate by 0.5%, what is the expected effect on the policy rate?

Accepted Answer

The policy rate will decrease by 0.5%

Question 8

Which of the following best explains why bonds are riskier and less liquid than money as a store of value?

Accepted Answer

Bond prices fluctuate with market interest rates

Question 9

What is the main transmission mechanism by which a lower policy interest rate increases aggregate demand domestically?

Accepted Answer

It increases consumption (C) and investment (I) by making borrowing cheaper

Question 10

Which of the following is a direct effect of the Bank of Canada raising the policy interest rate?

Accepted Answer

The Canadian dollar appreciates, reducing net exports

Question 11

During a balance sheet recession, why might monetary policy become less effective?

Accepted Answer

Individuals and businesses focus on paying down debt rather than borrowing and spending

Question 12

Which of the following best describes quantitative easing?

Accepted Answer

Central bank purchases large quantities of government bonds to lower long-term interest rates

Question 13

If the Bank of Canada sets the deposit rate at 2.25% and the bank rate at 2.50%, what is the width of the operating band?

Accepted Answer

$$0.25\%$$

Question 14

Which of the following is a consequence of unpredictable inflation?

Accepted Answer

It creates risk, discourages investment, and interferes with price signals

Question 15

Suppose the Bank of Canada wants to stimulate the economy during a recession. Which combination of actions is most likely?

Accepted Answer

Lower the policy interest rate and buy government bonds

Question 16

Which equation represents the price of a perpetuity bond that pays $$C$$ per year at an interest rate $$r$$?

Accepted Answer

$$\frac{C}{r}$$

Question 17

What is the main reason commercial banks in Canada are able to create money?

Accepted Answer

They make loans, which create demand deposits

Question 18

If the Bank of Canada’s inflation target is 2% and actual inflation is persistently above target, what is the most likely monetary policy response?

Accepted Answer

Raise the policy interest rate

Question 19

Which of the following best describes the effect of arbitrage in the overnight market when the overnight rate falls below the deposit rate?

Accepted Answer

Banks borrow in the overnight market and deposit funds at the Bank of Canada, pushing the overnight rate up

Question 20

Which of the following is NOT included in M1+ in Canada?

Accepted Answer

Savings accounts with limited transactions

Money, Monetary Policy, and the Bank of Canada: A Study Guide

Study Guide - Practice Questions