Question

When the Bank of Canada wants to induce a monetary expansion,
a. it can provide commercial banks with excess reserves and has considerable influence over how many new loans banks will make to the public.  
b. it can provide commercial banks with excess reserves but how many new loans will be made by the commercial banks is uncertain.  
c. it cannot generally provide commercial banks with excess reserves and how many new loans will be made by the commercial banks is uncertain.  
d. it cannot provide commercial banks with excess reserves and has no influence over how many new loans banks make to the public.  

The slope of the Phillips curve is drawn in such a way that it assumes that once the economy has relatively low unemployment rates, further reductions in the unemployment rate can occur only if the economy can accept larger increases in the inflation rate.
a. True
b. False

What action might the Bank of Canada take if it aims to reduce the money supply to slow inflation?
a. It might decrease its target for the overnight interest rate.  
b. It might buy government bonds on the open market.  
c. It might raise its target for the overnight interest rate.  
d. It might lend money to chartered banks

When the Bank of Canada sells a Canadian government bond, what are the effects on the volume of loans issued by the banking system and on investment?
a. The volume of loans issued by the banking system increases, and investment tends to increase.  
b. The volume of loans issued by the banking system increases, and investment tends to decrease.  
c. The volume of loans issued by the banking system decreases, and investment tends to increase.  
d. The volume of loans issued by the banking system decreases, and investment tends to decrease.

Answer 1

1) When the Bank of Canada wants to induce a monetary expansion, it can provide commercial banks with excess reserves but how many new loans will be made by commercial banks is uncertain. Here, only option b is valid.

2) The given statement is correct.

3) To reduce money supply and control inflation, Bank of Canada must raise its target for the overnight interest rate. Here, only option c is correct. All other options will increase money supply and thus, they are incorrect.

4) When Bank of Canada sells a Canadian government bond, excess reserve in the commercial banks will fall. As a result, volume of loans issued by the banking system and investment both decreases. Here, option d is the only correct answer.