A bank currently has $100,000 in demand deposits and $15,000 in actual reserves. If the reserve ratio is 20 percent, the bank has in money-creating potential. If the reserve ratio is 14 percent, the bank has in money-creating potential. $5.000; $1.000 8 0 $20,000: $14,000 0 $3,000: $2,100 0 $5,000; $1,000 Bank of Canada does not lead to an increase in bank lending. 2 True or False: A liquidity trap occurs when expansionary monetary policy fails to work because an increase in bank reserves by the 3 a. The overnight lending rate is G) the interest rate the banks charge one another on overnight loans. whereas the prime interest rate is the interest rate banks change on loans to their most creditworthy customers. 0 the interest rate the banks charge on loans to their most creciitw'ortl'lyr customers. whereas the prime interest rate is the interest rate banks charge their largest and most preferred business customers. O the interest rate the banks charge on loans to their most creciitw'ortl'lyr customers. whereas the prime interest rate is the interest rate banks charge one another on overnight loans. 0 the interest rate the Bank of Canada charges banks for a loan, whereas the prime interest rate is the interest rate banks charge their preferred customers. I). The overnight lending rate is lower than the prime interest rate because federal funds are loaned overnight. 0 higher than the prime interest rate because there are many alternative uses for the funds and opportunity costs must be accounted for. O nearlyr the same as the prime interest rate because they are both short term loans. 0 not comparable to the prime interest rate since the lenders are different. c. Changes in the overnight lending rate and the prime interest rate closely track one another because 0 there are fewer prime rate reserves available for lending. 6) both rates are related to the relative scarcity or availability of reserves. 0 all interest rates will be equal whether the customers are banks, businesses, or households. 0 the Bank of Canada arranges this to be the case. q a. The basic objective of monetary policy is to assist the economy in achieving a full-employment, non-inflationary level of total output. 0 eliminate inflation and lower interest rates. 0 Increase employment and stabilize exchange rates. 0 maintain steady exchange rates and lower ination. b. A major strength of monetary policy is (0 its speed and flexibility. 0 its long term consequences. 0 the Taylor rule, used to manage the economy. 0 the dependence of the Bank of Canada on the Government of Canada. c. Monetary policy is easier to conduct than fiscal policy because 6) monetary policy has a much shorter administrative lag than fiscal policy. 0 the economy responds better to monetary policy than scal policy. 0 the Bank of Canada has more control of the economy. 0 monetary policy is easier to understand. 5 a. When economists say that monetary policy can exhibit cyclical asymmetry, this means expansionary monetary policy is considered ineffective in pulling aggregate demand but may be effective in pushing it. O expansionary and restrictive monetary policy do not have the same potential for economic expansion and contraction. 01:42:09 O expansionary and restrictive monetary policy cannot both be used for economic expansion and contraction. O restrictive monetary policy is considered ineffective in pulling aggregate demand but may be effective in pushing it. b. The idea of a liquidity trap relates to cyclical asymmetry because the weakness of expansionary monetary policy means that even though the Bank of Canada decreases liquidity (cash reserves) in the system borrowing and lending stall. the weakness of restrictive monetary policy means that even though the Bank of Canada increases liquidity (cash reserves) in the system borrowing and lending stall. the weakness of expansionary monetary policy means that even though the Bank of Canada increases liquidity (cash reserves) in the system borrowing and lending stall. the weakness of restrictive monetary policy means that even though the Bank of Canada decreases liquidity (cash reserves) in the system borrowing and lending stall. O when you lead a horse to water it is possible to make it drink. c. Cyclical asymmetry is important to policymakers because it suggests that while monetary policy can effectively fight inflation, monetary policy may also be necessary to fight recession. O it suggests that while fiscal policy can effectively fight inflation, monetary policy may be necessary to fight recession. O it suggests that while monetary policy can effectively fight inflation, a liquidity trap may be necessary to fight recession. O it suggests that while monetary policy can effectively fight inflation, fiscal policy may be necessary to fight recession.for the loan. The bank rate that applies to the loan is 4 percent and the desired reserve ratio is 10 percent. How much of the $100,000 A bank borrows $100,000 from the Bank of Canada, leaving securities worth $100,000 with the Bank of Canada to serve as collateral borrowed by the bank will it keep as desired reserves? 0 $4,000 0 $100,000 $0