Question

Briefly explain the following (1 sentence each maximum - no graphs) in the textbox below:

a. How the Bank of Canada sets the Overnight Loans rate at 2%. (2)

b. One benefit and one drawback of inflation targeting. (2)

c. Deposit Switching. (2)

d. How the liquidity preference model differs from the loanable funds model. (2)

e. Why a bank run at the Royal Bank is highly unlikely. (2)

Answer 1

a.

The central bank of the country sets the overnight rate through “operating band” or “open market operation” or both.

b.

Benefit: low inflation reduces low expectation of wages that tends to demand low wages.

Drawback: the targeted inflation for long period of time may pull down the economic growth, since expansion can’t be done because of the fear of higher inflation.

c.

This is the process of transferring the government deposits between various commercial banks and the country’s central bank.

d.

In case of loanable funds concept, the money supply in the economy doesn’t depend on interest rates; but it does depend on interest rates in case of liquidity preference concept.

e.

This is the largest commercial bank of the country having operation all over the world and enjoying huge financial backup, making the customers feel assured.