Bank of Canada

In his speech, “Good money and your central bank”, the Governor Tiff Macklem said:

The Bank of Canada is committed to providing bank notes (cash) to the Canadian economy.

The Real-Time Rail system refers to

A new electronic payments infrastructure that will be more efficient than the existing systems

Choose the answer that best describes stablecoins.

Stablecoins are a type of digital currency that is always convertible at par to an established currency, such as the Canadian dollar.

True or false: stablecoins will be regulated by the Bank of Canada

True

True or false: stablecoins will be issued only by the Bank of Canada

False

True or false: When the Bank of Canada was established in the 1930s, the private Canadian banks were in favour because of the added stability the central bank would bring and their expectation that the new system would increase their profits?

False

Which of the following is a typical feature of a central bank?

Provides deposit accounts and credit to large domestic financial institutions.

Choose the best answer to complete the statement. Central banks usually:

Issue a national currency (bank notes) and the stock of these bank notes represents a liability for the central bank.

In what year was the Bank of Canada created by the Bank of Canada Act?

1934

True or false? The original preamble of the Bank of Canada Act required the Bank of Canada to protect the external value of the national monetary unit; since Canada now has a flexible exchange rate, the Bank of Canada Act has been amended to delete that requirement.

False

What is the name of the policy-making body of the Bank of Canada?

The Governing Council

In what way is the Bank of Canada independent? In what way is it transparent?

It is regarded as operationally independent from the Government as far as monetary policy is concerned. Though there is a disconnect between the democratically elected government and the very important decisions taken by the central bank that affects all Canadians.

Which of the following is a recent example of increased transparency at the Bank of Canada?

Publication of deliberation by decision-makers on policy decisions.

What are the five core functions of the Bank of Canada?

Currency, funds management, financial system, retail payments supervision, and monetary policy

Since the end of the second world war, in which period did Canada experience the highest sustained rates of inflation?

The great inflation of the 1970s

Which of the following describes stagflation?

high inflation and high unemployment

Which of the following best describes monetarism?

the practice of targeting the growth rate of the money supply to achieve price stability

True or false: Canada’s experience with monetarism was successful?

True

True or false: The Bank of Canada continues to target the growth rate of M1, as outlined in the Saskatoon Manifesto of 1975.

False

True or false: The Government of Canada can issue a directive to the Governor of the Bank of Canada to follow a specific course for monetary policy for a set period of time.

True

Which of the following best describes the medium of exchange role for money?

something that buyers and sellers accept for settlement of transactions and something that can be held for the purpose of future purchases

True or false: the Bank of Canada lost control of inflation during the pandemic of 2020-22 and it remains above five percent in 2026

False

“The Government of Canada and the Bank of Canada believe that the best contribution of monetary policy to the well-being of Canadians is to continue to focus on — .” Fill in the blank

price stability

Which of the following is not part of the inflation target as specified in the Joint Statement?

The maximum sustainable level of employment will be the primary objective of the inflation target

As specified in the Joint Statement, what do the Government of Canada and the Bank of Canada agree is the best way, based on experience, for monetary policy to achieve the economic and financial well-being of Canadians?

maintaining a low and stable inflation environment

True or false: the inflation control target is symmetric around the two percent midpoint target for inflation?

True

True or false: the Bank of Canada has eight fixed announcement dates for monetary policy.

True

True or false: the Bank of Canada can only change monetary policy on one of the fixed announcement dates.

False

The Bank of Canada currently has two preferred measures of core inflation. These are:

CPI-Trim and CPI-median

What are the two key components of the monetary policy framework, according to the Bank of Canada?

the inflation control target and the flexible exchange rate

What year did the Bank of Canada, in agreement with the Government of Canada, begin to start targeting inflation?

1991

What is the definition (meaning) of maximum sustainable employment?

the level of employment beyond which inflationary pressures arise

What is the principal monetary policy instrument used by the Bank of Canada?

policy interest rate target/policy interest rate

If the overnight rate target is set by the Bank of Canada at 2.00 percent, what is the Deposit Rate offered by the Bank of Canada to financial institutions that are part of the Payments System?

1.95%

If the overnight rate target is set by the Bank of Canada at 2.00 percent, what is the Bank Rate offered by the Bank of Canada to financial institutions that are direct participants of payments system?

2.25%

What is the purpose of changing the target for the overnight rate?

This is the market that the major financial institutions use to lend and borrow among themselves overnight depending upon their settlement positions at the end of each trading day

True or false: the yields (interest rates) on Government of Canada bonds were higher in the early 1990s than they are in the 2020s.

True

Deflation refers to a situation of:

on average, prices are falling

What is the purpose of monitoring core inflation measures?

To get a clearer picture of underlying, broad movements in prices

Which of the following best describes the relationship between economic activity and inflation?

When firms, governments, and households are operating above normal capacity, wages and prices are likely to be increasing faster than the inflation target

What is meant by quantitative easing? Quantitative tightening?

lowers longer-term interest rates (all else equal) and raises longer-term interest rates (all else equal)

What are the channels for changes in monetary policy to affect economic activity?

An increase in interest rates, all else equal, will tend to slow economic activity, The slower economic activity will tend to ease inflation pressures, A decrease in interest rates works in the opposite direction, tending to increase economic activity and increase in inflation, and Canadian dollar exchange rate

True or false: the Bank of Canada knows exactly how a change in monetary policy will affect economic activity

False

True or false: When setting monetary policy, the Bank of Canada does not consider how changes in interest rates will influence exchange rates, and how changes in exchange rates will influence economic activity.

False

Which of the following best describes monetary policy in Canada during the pandemic

the Bank of Canada lowered the target for the overnight rate to 0.25 percent and purchased a large amount of Government of Canada bonds

True or false: When the Bank of Canada undertakes quantitative easing, they do not publicly report the effects this has on their balance sheet.

False

In Figure 1, the dashed lines at 1 and 3 percent inflation rates represent

The lower and upper bands of the Bank of Canada’s inflation control range

Which of the following best completes the following sentence. In Figure 1, projections for inflation are:

consistent with the Bank of Canada’s inflation control target because inflation is between one and three percent over the policy horizon and converging towards the two percent inflation target by the end of the policy horizon

Figure ?? identifies the policy horizon. In practice, how long is the Bank of Canada’s policy horizon?

6–8 quarters

With reference to Figure ??, which of the following statements best describes the Bank of Canada’s situation at the point labelled ‘now’?

The projected inflation path reflects the Bank of Canada’s current and anticipated future monetary policy decisions and, given these projections, these monetary policy decisions are consistent with its inflation control target.

With reference to Figure ??, which of the following statements is an example of forward guidance as used for monetary policy?

To ensure that inflation returns to the two percent midpoint inflation target, the Bank of Canada is providing these inflation projections to assist borrowers with their financial decisions

Suppose you are the Governor of the Bank of Canada and your staff has presented you with a projection for inflation that assumes the policy interest rate is not changed over the policy horizon. The projection is as shown in Figure ??. Which of the following is a reasonable policy decision to make at the point ‘now’ and justification for that decision?

Lower the policy interest rate in order to bring projected inflation back toward two percent by the end of the policy horizon.

Suppose you are the Governor of the Bank of Canada and your staff has presented you with a projection for inflation that assumes the policy interest rate is not changed over the policy horizon. The projection is as shown in Figure ??. Your staff has also provided you with updates on the Canadian economy which show that economic activity in Canada is well below normal capacity and projected to remain below normal capacity over the entire policy horizon. Which of the following best describes the policy trade-off you face as Governor.

An increase in the policy interest rate is needed to to keep inflation within the inflation control target; however, this will further reduce economic activity