Question

In: Economics

When the inflation rate is 4 percent, the Bank of Canada will A) buy bonds to...

When the inflation rate is 4 percent, the Bank of Canada will

A) buy bonds to lower interest rates and increase aggregate demand.

B) sell bonds to raise interest rates and decrease aggregate demand.

C) do nothing, since an interest rate of 4 percent is desirable.

D) sell bonds to lower interest rates and accelerate the economy.

E) buy bonds to raise interest rates and slow down the economy.

When the Bank of Canada buys bonds from a chartered bank, chartered bank reserves

A) decrease and chartered banks make additional loans.

B) increase and chartered banks reduce loans.

C) decrease and chartered banks reduce loans.

D) decrease and interest rates fall.

E) increase and chartered banks make additional loans.

If Canadian interest rates rise, the value of the Canadian dollar ________ and net exports ________.

A) appreciates; increase

B) appreciates; decrease

C) depreciates; increase

D) depreciates; decrease

E) appreciates only if U.S. interest rates also fall; decrease

Solutions

Expert Solution

Ans .
When the inflation rate is 4 percent, the Bank of Canada will , B) sell bonds to raise interest rates and decrease aggregate demand.
4% inflation is very high which means the economy is overheating. Central bank will adopt the contractionary monetary policy and Sale the bonds to reduce the money supply from the market and reduce the aggregate demand.
Ans .
When the Bank of Canada buys bonds from a chartered bank, chartered bank reserves E) increase and chartered banks make additional loans.
Buying the bonds means increasing the money supply in the banks and banks in trun will issue more loans and the money supply will increase in the economy. This is form of expansionary monetary policy.

An.s
If Canadian interest rates rise, the value of the Canadian dollar ________ and net exports ________
B) appreciates; decrease
When the interest rate increase , there will be more people interested to invest in Canada and this will cause high demand for Canadian dollar and Canadian dolar witll appreciate. When the currency appreciates , the net exports will decrease.


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