Question

1.

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

A) buy bonds to lower interest rates and shift the aggregate demand curve rightward.

B) sell bonds to raise interest rates and shift the aggregate demand curve leftward.

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.

2.

If the annual inflation rate is 0.5 percent, the Bank of Canada will

A) sell bonds to raise interest rates and slow down the economy.

B) buy bonds to lower interest rates and accelerate the economy.

C) do nothing since an inflation rate of 0.5 percent is desirable.

D) buy bonds to raise interest rates and increase aggregate demand.

E) sell bonds to lower interest rates and increase aggregate demand.

3.

. During a period of deflation the Bank of Canada will

A) raise interest rates, causing an exchange rate depreciation.

B) lower interest rates, causing an exchange rate appreciation.

C) do nothing because falling prices are good.

D) lower interest rates, causing an exchange rate depreciation.

E) raise interest rates, causing an exchange rate appreciation.

Answer 1

1. When the inflation rate is 4 percent, the Bank of Canada will “sell bonds to raise interest rates and shift the aggregate demand curve leftward.”

when inflation is high, the central bank suck out the excess money supply by selling bonds to the banks and decreasing the money supply causing increase in interest rates.

2. If the annual inflation rate is 0.5 percent, the Bank of Canada will “buy bonds to lower interest rates and accelerate the economy.”

When the inflation is low and below BOC target level, the central bank will decrease interest rate by buying bonds from banks and increasing reserves of banks so that they can lend in the market

3. During a period of deflation the Bank of Canada will “lower interest rates, causing an exchange rate depreciation.”

During deflationary pressure GDP declines and central bank reduces interest rate to spur growth and investments.