Sample Final Exam 7570

1) The Bank of Canada ultimate objective is ________.

A) price stability
B) to keep interest rates low
C) economic growth
D) low unemployment

2) The overall responsibility for the operation of the bank of Canada is held by the ________.
A) Board of Directors
B) Federal Government
C) Ministry of Finance
D) Provincial governments

3) Under the current "joint responsibility system," ________.

A) in the event of a serious policy conflict the minister of finance can issue a directive that the
Bank of Canada must follow
B) the government accepts full responsibility for monetary policy
C) the Bank of Canada does not have considerable autonomy in the conduct of day-to-day
monetary policy
D) A and B only.

4) Advocates of Bank of Canada independence fear that subjecting the Bank to direct
government control would ________.
A) impart an anti-inflationary bias to monetary policy
B) force monetary authorities to sacrifice the long-run objective of price stability
C) make the so-called political business cycle even more pronounced
D) B and C only.

5) Because of its unique power to ________ base money, the Bank of Canada can ease the
liquidity problems of ________.
A) create; financial institutions
B) create; provincial governments
C) save; financial institutions
D) save; provincial governments

6) The benefit of the Bank of Canada's role as the lender-of-last-resort include ________.
A) easing liquidity problems of any financial institution
B) deterring bank runs and panics
C) reducing the monetary base to increase liquidity
D) A and B only
7) Both ________ and ________ are Bank of Canada assets.
A) notes in circulation; reserves
B) notes in circulation; government securities
C) government securities; advances to banks
D) government securities; reserves

8) When the Bank of Canada sells $100 worth of bonds to First National Bank, reserves in the
banking system ________.
A) increase by $100
B) increase by more than $100
C) decrease by $100
D) decrease by more than $100

9) When the Bank of Canada supplies the banking system with an extra dollar of reserves,
deposits increase by more than one dollar - a process called ________.
A) extra deposit creation
B) multiple deposit creation
C) expansionary deposit creation
D) stimulative deposit creation

10) In the simple deposit expansion model, an expansion in chequable deposits of $1000 when
the desired reserve ratio is equal to 20 percent implies that the Bank of Canada ________.
A) sold $200 in government bonds
B) sold $500 in government bonds
C) purchased $200 in government bonds
D) purchased $500 in government bonds

11) Interest rate stability is desirable because ________.

A) fluctuations in interest rates create uncertainty
B) it leads to financial market stability
C) stability in the foreign exchange markets
D) all of the above

12) The price of a barrel of oil doubled between 2007 and the middle of 2008. To make matters
worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the
following is true of the Chinese experience?
A) The worldwide decline in demand led to a collapse of Chinese exports.
B) Instead of relying solely on the economy's self-correcting mechanism, much more
aggressive fiscal expansions than those of the U.S. (in addition to a substantial monetary
easing) served to shift the AD curve back to general equilibrium relatively quickly.
C) The Chinese economy was better able than the U.S. economy to weather the financial crisis
with output growth starting to grow earlier and more quickly than that of the U.S.
D) All of the above.
E) None of the above.
13) Hierarchical mandates ________.
A) puts the goal of price stability first and then allows for other goals
B) requires all goals to be met simultaneously
C) is only used by the Bank of Canada
D) is only used by the Federal Reserve

14) Due to the lack of timely data for the price level and economic growth, the Bank of
Canada's strategy ________.
A) targets the exchange rate, since the Bank of Canada can control this variable
B) targets the price of gold, since it is closely related to economic activity
C) uses an intermediate target, such as an interest rate
D) stabilizes the consumer price index, since the Bank of Canada can control the CPI

15) The marginal propensity to consume (mpc) can be defined as the fraction of ________.
A) a change in income that is spent
B) a change in income that is saved
C) income that is spent
D) income that is saved

16) If the consumption function is C = 20 + 0.5YD, then an increase in disposable income by

$100 will result in an increase in consumer expenditure by ________.
A) $25
B) $70
C) $50
D) $100

17) There are two types of investment: ________ investment—the spending by business firms
on equipment and structures, and planned spending on residential houses—and ________
investment—spending by business firms on additional holdings of raw materials, parts, and
finished goods.
A) planned; gross
B) planned; inventory
C) fixed; gross
D) fixed; inventory

18) Factors that influenced planned investment spending include ________.

A) real interest rates
B) financial frictions
C) emotional waves of optimism and pessimism
D) all of the above
19) In the Keynesian framework, as long as output is ________ the equilibrium level,
unplanned inventory investment will remain ________ and firms will continue to lower
production.
A) below; negative
B) above; negative
C) below; positive
D) above; positive

20) By analyzing aggregate demand through its component parts, we can conclude that,
everything else held constant, a decline in the inflation rate causes ________.
A) an increase in real interest rates, an increase in investment spending, and a decline in
aggregate output demand
B) a decline in real interest rates, a decrease in investment spending, and an increase in
aggregate output demand
C) a decline in real interest rates, an increase in investment spending, and an increase in
aggregate output demand
D) an increase in real interest rates, a decline in investment spending, and a decline in
aggregate output demand
Solutions:

1.A

2.A

3.D

4.D

5.A

6.D

7.C

8.C

9.B

10.C

11.D

12.D

13.A

14.C

15.A

16.C

17.D

18.D

19. D

20. C