a)Suppose the Bank of Canada wants to eliminate an inflationary gap that threatens its inflation rate target by reducing aggregate expenditure and aggregate demand. It would initially:

1. increase its setting for the overnight interest rate and the bank rate.
2. reduce its setting for the overnight interest rate and the bank rate.
3. buy government bonds on the open market to change the monetary base.
4. reduce the required reserve ratio in the banking system.

b)If a central bank implements monetary policy through either interest rate control or money supply control, a rise in the growth rate of the nominal money supply relative to the growth rate of nominal GDP is an indictor of:

1. a shift to expansionary fiscal policy.
2. a shift to restrictive monetary policy.
3. a shift to expansionary monetary policy.
4. a shift it in the inflation target set by the central bank.

c)In the short run, a central bank that operates to an interest rate rule (a Taylor rule) reacts to a recessionary gap by:

1. decreasing interest rates to increase AE, increase AD and decrease equilibrium real GDP.
2. decreasing interest rates to increase AE, increase AD and increase equilibrium real GDP.
3. increasing interest rates to increase AE, decrease AD and decrease equilibrium real GDP.
4. increasing interest rates to decrease AE, decrease AD and decrease equilibrium real GDP.

d)If a central bank conducts monetary policy by setting a target for the money supply, or the money supply growth rate, as the Bank of Canada did in the late 1970's:

1. it must then accept the interest rate, exchange rate and inflation rate required by its money supply target.
2. it must then set the exchange rate required for a zero inflation rate.
3. it must also set a target for the inflation rate that is independent of its money supply growth rate target.
4. it must then set the interest rate as required for equilibrium real GDP equal to potential GDP.

e)The main objective of a central bank's operations is:

1. to design, print and distribute the bank notes available to the public through ATMs.
2. to provide the finances necessary for government expenditures.
3. to manage the size of the monetary base, the currency and central bank deposits, used by other financial institutions and the public.
4. to maximize the profits it makes for its shareholders, the large insurance and investment companies.