Questions and Answers of Economics Money Banking

If Canadian auto companies make a breakthrough in automobile technology and are able to produce a car that gets 50 kilometres to the litre, what will happen to the Canadian exchange rate?
If nominal interest rates in Canada rise but real interest rates fall, predict what will happen to the Canadian exchange rate.
Suppose the governor of the Bank of Canada announces a new set of reforms which includes a new anti-inflation program. Assuming the announcement is believed by the public, what will happen to the
When the Bank of Canada conducts an expansionary monetary policy, what happens to the money supply? How does this affect the supply of dollar assets?
If the Japanese price level rises by 5% relative to the price level in Canada, what does the theory of purchasing power parity predict will happen to the value of the Japanese yen in terms of
When the Canadian dollar depreciates, what happens to exports and imports in Canada?
If the Bank of Canada has an interest-rate target, why will an increase in the demand for reserves lead to a rise in the money supply? Use a graph of the market for reserves to explain.
What does the Taylor rule imply that policymakers should do to the overnight interest rate under the following scenarios?a. Unemployment rises due to a recession.b. An oil price shock causes the
How can bank behaviour and the Bank of Canada’s behaviour cause money supply growth to be procyclical (rising in booms and falling in recessions)?
“Interest rates can be measured more accurately and quickly than reserve aggregates; hence an interest rate is preferred to the reserve aggregates as a policy instrument.” Do you agree or
What procedures can the Bank of Canada use to control the overnight interest rate? Why does control of this interest rate imply that the Bank of Canada will lose control of nonborrowed reserves?
“If the demand for reserves did not fluctuate, the Bank of Canada could pursue both a reserves target and an interest-rate target at the same time.” Is this statement true, false, or uncertain?
Classify each of the following as either a policy instrument or an intermediate target, and explain why.a. The 10-year Canada bond rateb. The monetary basec. M1+d. The overnight interest rate
What are the key advantages and disadvantages of the monetary strategy recently used at the Federal Reserve in which the nominal anchor is only implicit?
Go to the CANSIM data available in the Student Resources section of your MyEconLab website and download daily data since January 1996 for the bank rate (V39078) and the target overnight rate
Using the supply and demand analysis of the market for reserves, indicate what happens to the overnight interest rate, borrowed reserves, and nonborrowed reserves holding everything else constant,
If there is a switch from deposits into currency, what happens to the overnight interest rate? Use the supply and demand analysis of the market for reserves to explain your answer.
Compare the use of open market operations and government deposit shifting to control the money supply, using the following criteria: flexibility, reversibility, effectiveness, and speed of
“The channel/corridor system for setting interest rates enables the Bank of Canada to set the overnight rate whatever the demand for reserves, including zero demand.” Discuss.
Explain how SPRAs and SRAs affect the overnight rate.
How can the procyclical movement of interest rates (rising during business cycle expansions and falling during business cycle contractions) lead to a procyclical movement in the money supply as a
You often read in the newspaper that the Bank of Canada has just lowered the target overnight rate. Does this signal that the Bank is moving to a more expansionary monetary policy? Why or why not?
The benefits of using last-resort lending to prevent bank panics are straightforward. What are the costs?
“Last-resort lending is no longer needed because the presence of the CDIC eliminates the possibility of bank panics.” Discuss.
Discuss how the operating band affects interest rates and the money supply in the economy.
If the Bank of Canada did not administer the operating band, what do you predict would happen to the money supply if the bank rate were several percentage points below the overnight rate?
“The only way that the Bank of Canada can affect the level of advances is by adjusting the bank rate.” Is this statement true, false, or uncertain? Explain your answer.
“In the LVTS environment, government deposit shifting is affected by auctions of government balances.” Discuss.
If the government has just paid for major computer upgrades and as a result its deposits with the Bank of Canada fall, what open market operations could be undertaken?
During the holiday season, when the public’s holdings of currency increase, what open market operations typically occur? Why?
If government deposits at the Bank of Canada are predicted to increase, what open market operations could be undertaken to neutralize the effect on settlement balances?
Continuing from the previous question, compute the growth rates of M1++ and M2++.a. What is the average M1++ growth rate? Its variance?b. What is the average M2++ growth rate? Its variance?c. Which
An important aspect of the money supply process is the money multiplier. Go to the CANSIM data available in the Student Resources section of your MyEconLab website and download Statistics Canada
If the Bank of Canada sells $1 million of bonds and banks reduce their borrowings from the Bank of Canada by $1 million, predict what will happen to the money supply.The desired reserve ratio on
If the Bank of Canada reduces reserves by selling $5 million worth of bonds to the banks, what will the T-account of the banking system look like when the banking system is in equilibrium? What will
If reserves in the banking system increase by $1 billion as a result of Bank of Canada lending to financial institutions of $1 billion, and chequable deposits increase by $9 billion, why isn’t the
If the Bank of Canada buys $1 million of bonds from the First National Bank, but an additional 10% of any deposit is held as excess reserves, what is the total increase in chequable deposits? (Hint:
Using T-accounts, show what happens to chequable deposits in the banking system when the Bank of Canada sells $2 million of bonds to the First National Bank.The desired reserve ratio on chequable
Using T-accounts, show what happens to chequable deposits in the banking system when the Bank of Canada lends an additional $1 million to the First National Bank.The desired reserve ratio on
If the Bank of Canada lends five banks an additional total of $100 million but depositors withdraw $50 million and hold it as currency, what happens to reserves and the monetary base? Use T-accounts
If the Bank of Canada sells $2 million of bonds to Irving the Investor, who pays for the bonds with a briefcase filled with currency, what happens to reserves and the monetary base? Use T-accounts to
If the Bank of Canada sells $2 million of bonds to the First National Bank, what happens to reserves and the monetary base? Use T-accounts to explain your answer.The desired reserve ratio on
In October 2008, the Federal Reserve began paying interest on the amount of excess reserves held by banks. How, if at all, might this affect the multiplier process and the money supply in the United
During the Great Depression years from 1930 to 1933, both the currency ratio c and the excess reserves ratio e rose dramatically in the United States. What effect did these factors have on the money
The Bank of Canada buys $100 million of bonds from the public and there is also a decline in the desired reserve ratio. What will happen to the money supply?
“The Bank of Canada can perfectly control the amount of the monetary base, but has less control over the composition of the monetary base.” Is this statement true, false, or uncertain? Explain.
“The Bank of Canada can perfectly control the amount of reserves in the system.” Is this statement true, false, or uncertain? Explain.
Suppose that the Bank of Canada buys $1 million of bonds from the First National Bank. If the First National Bank and all other banks use the resulting increase in reserves to purchase securities
Why did Canada show little interest in the establishment of a central bank during the first 60 or so years of Confederation?
“The independence of the Bank of Canada leaves it completely unaccountable for its actions.” Is this statement true, false, or uncertain? Explain your answer.
Why might eliminating the Bank’s independence lead to a more pronounced political business cycle?
“The theory of bureaucratic behaviour indicates that the Bank of Canada never operates in the public interest.” Is this statement true, false, or uncertain? Explain your answer.
How is the responsibility for monetary policy shared in the Eurosystem?
How can the government directly influence the Bank of Canada?
The Bank of Canada is the most independent of all Canadian government agencies. What is the main difference between it and other government agencies that explains its greater independence?
If you buy a put option on a $100 000 Canada bond futures contract with an exercise price of 95 and the price of the Canada bond is 120 at expiration, is the contract in the money, out of the money,
“The strongest argument for an independent Bank of Canada rests on the view that subjecting the Bank of Canada to more political pressures would impart an inflationary bias to monetary policy.”
Over time, which entities have gained power in the conduct of monetary policy in Canada and which have lost power? Why do you think this has happened?
How did the “Coyne Affair” motivate the current system of joint responsibility for monetary policy?
Why can a money market mutual fund allow its shareholders to redeem shares at a fixed price but other mutual funds cannot?
Why might government loan guarantees be a high-cost way for the government to subsidize certain activities?
If you like to take risks, would you rather be a dealer, a broker, or a specialist? Why?
Is investment banking a good career for someone who is afraid of taking risks? Why or why not?
How do hedge funds differ from mutual funds?
How do private equity funds escape the free-rider problem?
What are the four advantages of private equity funds?
How have GSEs in the United States exposed taxpayers to large losses?
Using the T-accounts of the First Bank and the Second Bank, describe what happens when Jane Brown writes a $50 cheque on her account at the First Bank to pay her friend Joe Green, who in turn
What happens to reserves at the First Bank if one person withdraws $1000 of cash and another person deposits $500 of cash? Use T-accounts to explain your answer. Questions 21 and 22 relate to the
If the portfolio you manage is holding $25 million of 8s of 2030 Canada bonds with a price of 110, what forward contract would you enter into to hedge the interest rate risk on these bonds over the
If at the expiration date, the deliverable Canada bond is selling for 101 but the Canada bond futures contract is selling for 102, what will happen to the futures price? Explain your answer.
If you buy a $100,000 June Canada bond contract for 108 and the price of the deliverable Canada bond at the expiration date is 102, what is your profit or loss on the contract?
Suppose that you buy a call option on a $100,000 Canada bond futures contract with an exercise price of 110 for a premium of $1500. If on expiration the futures contract has a price of 111, what is
If the bank you manage has a gap of –$42 million, describe an interest-rate swap that would eliminate the bank’s income risk from changes in interest rates.
Suppose that your company will be receiving 30 million euros six months from now and the euro is currently selling for 1.4 Canadian dollars. If you want to hedge the foreign exchange risk in this
A swap agreement calls for Rocky Industries to pay interest annually based on a rate of 2% over the one-year T-bill rate, currently 3%. In return, Rocky Industries receives interest at a rate of 4%
What political realities might explain the creation of the Bank of Canada in 1934?
In what ways can the government influence the conduct of monetary policy?
Who is responsible for monetary policy in Canada?
Do you think that the seven-year renewable term for the governor of the Bank of Canada effectively insulates the Bank from political pressure?
Why might you buy a no-load mutual fund instead of a load fund?
Explain why shares in closed-end mutual funds typically sell for less than the market value of the stocks they hold.
If you needed to take out a loan, why might you first go to your local bank rather than to a finance company?
Why are restrictive provisions a necessary part of insurance policies?
Why might insurance companies restrict the amount of insurance a policyholder can buy?
What explains the widespread use of deductibles in insurance policies?
“In contrast to private pension plans, government pension plans are rarely underfunded.” Is this statement true, false, or uncertain? Explain your answer.
How can favourable tax treatment of pension plans encourage saving?
Why are all defined-contribution pension plans fully funded?
Why do property and casualty insurance companies have large holdings of liquid assets but life insurance companies do not?
If death rates were to become less predictable than they are, how would life insurance companies change the types of assets they hold?
What are the essential differences between chartered banks, trust and loan companies, and credit unions and caisses populaires?
If the bank at which you keep your chequing account is owned by Saudi Arabians, should you worry that your deposits are less safe than if Canadians owned the bank?
Explain how securitization can be used to change illiquid assets into liquid assets.
What incentives do Canadian regulatory agencies have to encourage the establishment of foreign banks in Canada?
Explain how the early development of chartered banks in Canada differed from the development of commercial banks in the United States.
Explain how sovereign loans in the 1970s and early 1980s caused problems for the Big Six.
Contrast the activities of a Schedule I bank, a Schedule II bank, a trust company, and a credit union.
How did new technology cause banks’ traditional lending activities to decline in balance-sheet importance?
“The commercial banking industry in Canada is less competitive than the commercial banking industry in the United States because in Canada only a few large banks dominate the industry, while in the

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