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Exam 15: Interest Rates and Monetary Policy

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Question 21

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When does the use of monetary policy create conflicts between the goals of macroeconomic stability and balance of international trade?

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A conflict between macroeconomic stabili...

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Question 22

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What is the relationship between the overnight lending rate and the prime interest rate? Why doesn't the Bank of Canada target the prime interest rate?

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The prime interest rate is the rate that...

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Question 23

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Identify the major items in the consolidated balance sheet of the Bank of Canada.

What are the two reasons that people want to hold money? In other words,what are the two types of demand for money?

Explain how the net export effect strengthens the effects an easy money and a tight money policy.

Use the table below to answer the questions.

How does an increase in nominal GDP affect the equilibrium rate of interest?

How is the overnight lending rate established? What role does the Bank of Canada play?

What are the two strengths that monetary policy has over fiscal policy?

Use the table below to answer the questions:

What is the goal of monetary policy?

Suppose the economy is experiencing a recession and high unemployment.Describe the transmission mechanism through which monetary policy could address these problems?

Other things being equal,what effect will each of the following have on the equilibrium rate of interest? (a)an increase in the money supply; (b)an increase in nominal GDP; (c)a decrease in the money supply; (d)a leftward shift of the asset demand for money.

What is the net export effect of a tight monetary policy? Explain.

Differentiate between expansionary and restrictive monetary policies.

Both the Bank of Canada and chartered banks buy and sell government securities,but for substantially different reasons.Explain.

The total demand for money is equal to the transactions demand plus the asset demand for money. (a)Assume that each dollar held for transactions purposes is spent on the average five times per year to buy final goods and services.If nominal GDP is $1,000 billion (or $1 trillion),what is the transactions demand? (b)The table below shows the asset demand at certain rates of interest.Using your answer to part (a),complete the table to show the total demand for money at various rates of interest.

Explain how the two principal tools of monetary policy are used.

Trace the cause-effect chain that results from an easy money policy.

Describe the links between monetary policy and the international economy due to the net export effect,and its impact on the trade deficit.