Economics of Money, Banking, and Financial Markets 6e (Mishkin)

Chapter 14 Central Banks and the Bank of Canada

14.1 Origins of the Bank of Canada

1) From 1929 to 1933 the Canadian real GDP fell by almost ________.
A) 30 percent
B) 40 percent
C) 50 percent
D) 20 percent
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 14.1 Recognize the historical context of the development of the Bank of Canada

2) Unemployment rates in Canada after the Great Depression rose close to ________.
A) 20 percent
B) 25 percent
C) 30 percent
D) 10 percent
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 14.1 Recognize the historical context of the development of the Bank of Canada

3) The Great Depression contributed to significant changes in Canadian ________.

A) monetary policy
B) nationalization
C) growth policy
D) immigration
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 14.1 Recognize the historical context of the development of the Bank of Canada

4) Bank of Canada started operations in ________.

A) 1935
B) 1925
C) 1915
D) 1945
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 14.1 Recognize the historical context of the development of the Bank of Canada
5) The Great Depression contributed to significant changes in Canadian ________.
A) deficits
B) monetary policy
C) foreign affairs policy
D) immigration policy
Answer: B
Diff: 1 Type: MC
Skill: Recall
Objective: 14.1 Recognize the historical context of the development of the Bank of Canada

6) The Great Depression ________.

A) was of fundamental importance in the creation of the Bank of Montreal
B) contributed to significant changes in government policy
C) involved the largest increase in the level of economic activity in the history of Canada
D) contributed to significant changes in foreign affairs policy
Answer: B
Diff: 1 Type: MC
Skill: Recall
Objective: 14.1 Recognize the historical context of the development of the Bank of Canada

7) The main motivation for the formation of the Bank of Canada in 1934 was ________.
A) financial
B) the need for Canada to reflect its growing political independence from Britain
C) the need for Canada to coordinate its international trade policy
D) government debt
Answer: B
Diff: 1 Type: MC
Skill: Recall
Objective: 14.1 Recognize the historical context of the development of the Bank of Canada

8) The Bank of Canada has regional offices in which of the following cities?
A) Saskatoon
B) Edmonton
C) Montreal
D) Winnipeg
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: 14.1 Recognize the historical context of the development of the Bank of Canada

9) The Bank of Canada has regional offices in the following cities, except ________.
A) Toronto
B) Vancouver
C) Edmonton
D) Halifax
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: 14.1 Recognize the historical context of the development of the Bank of Canada
10) The oldest central bank, having been founded in 1656, is the ________.
A) Riksbank, the central bank of Sweden
B) Deutsche Bundesbank
C) Bank of Japan
D) Federal Reserve System
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 14.1 Recognize the historical context of the development of the Bank of Canada

14.2 Formal Structure of the Bank of Canada

1) Which of the following are entities of the Bank of Canada?

A) The Office of the Superintendent of Financial Institutions (OSFI)
B) The Governing Council
C) The Canada Deposit Insurance Corporation (CDIC)
D) The Federal Reserve
Answer: B
Diff: 1 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada

2) Which of the following are entities of the Bank of Canada?

A) The Office of the Superintendent of Financial Institutions (OSFI)
B) The Board of Directors
C) The Canada Deposit Insurance Corporation (CDIC)
D) The Department of Finance
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada

3) All of the following have served as Bank of Canada governors except for ________.
A) Roy Romanow
B) David Dodge
C) Gordon Thiessen
D) John Crow
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada
4) Which of the following is an element of the Bank of Canada?
A) The Office of the Superintendent of Financial Institutions (OSFI)
B) The Governing Council
C) The Board of Directors
D) B and C only
Answer: D
Diff: 1 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada

5) The overall responsibility for the operation of the bank of Canada is held by the ________.
A) Board of Directors
B) Federal Government
C) Ministry of Finance
D) Provincial governments
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada

6) The Board of Directors appoints the governor of the Bank of Canada for a renewable term of
________ years.
A) seven
B) five
C) eight
D) six
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada

7) The Bank of Canada quarterly Monetary Policy Report is published every ________,
________, ________ and ________.
A) January; April; July; October
B) February; May; August; November
C) March; June; September; December
D) January; February; August; December
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada
8) Describe the structure of the Bank of Canada.
Answer: The overall responsibility for the operation of the Bank of Canada rests with the
Board of Directors which consists of fifteen members. The governor, the senior deputy
governor, the deputy minister of finance and twelve outside directors. The board appoints the
governor and the senior deputy governor with the governments approval for a term of seven
years. The outside directors are appointed by the minister of finance for a three-year term and
they are required to come from all regions of Canada and a variety of occupations with the
exception of banking.
Diff: 3 Type: ES
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada

14.3 The Functions of the Bank of Canada

1) Which of the following functions does the Bank of Canada perform?

A) Bank note issue
B) Municipal government fiscal policy management
C) Provincial government fiscal policy management
D) Advise the Federal Reserve
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada

2) Which of the following is a responsibility of the Bank of Canada?

A) Funds management
B) Fiscal policy
C) Equalization payments
D) Foreign policy
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada

3) Treasury bills are a responsibility of ________.

A) the Bank of Canada
B) Canada Investment and Savings
C) Ministry of the Treasury
D) the federal government
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada
4) Foreign exchange reserves are held by ________.
A) the federal government
B) the department of finance
C) the Ministry of Central Banking
D) individual provinces and territories
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada

5) The benefit of the Ban k of Canada's role as the lender-of-last-resort include ________.
A) easing liquidity problems of any financial institution
B) deterring bank runs and panics
C) reducing the monetary base to increase liquidity
D) A and B only
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada

6) Base money is also know as ________.

A) monetary base
B) power money
C) monetary liability
D) fund accounts
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada

7) The Bank of Canada assumed the monopoly of issuing bank notes in ________.
A) 1945
B) 1939
C) 1940
D) 1949
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada

8) Which of the following functions are not performed by the Bank of Canada?
A) Cheque clearing
B) Conducting economic research
C) Setting interest rates payable on time deposits
D) Issuing new currency
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada
9) In its role as provider of paper money, the Bank of Canada ________.
A) works closely with private sector partnerships and note-issuing authorities in other countries
in order to improve cost-effectiveness, increase the durability of Canadian bank notes, and
reduce counterfeiting
B) tries to preserve the integrity and safety of Canadian currency in the most economical and
efficient manner possible
C) None of the above.
D) A and B only.
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada

10) In its role as the federal government's fiscal agent, the Bank of Canada provides debt
management services for the federal government such as ________.
A) advising on provincial government borrowings
B) managing new debt offerings by the federal government
C) servicing the federal government's outstanding debt
D) B and C only.
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada

11) Which of the following functions are not performed by the Bank of Canada in its role as the
federal government's fiscal agent?
A) Advising on federal government borrowings
B) Managing new debt offerings by the federal government
C) Setting interest rates payable on time deposits
D) Servicing the federal government's outstanding debt
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada

12) In its role as provider of central banking services, the Bank of Canada ________.
A) serves as a lender of last resort if a deposit-taking institution faces a liquidity crisis
B) plays a central role in Canada's national mortgage system
C) is responsible for the government's operating accounts and for managing the government's
foreign exchange reserves
D) A and C only.
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada
13) In its role as provider of central banking services, the Bank of Canada holds deposit
accounts of the ________.
A) provincial governments
B) directly clearing members of the Canadian Payments Association
C) international organizations, such as the International Monetary Fund
D) B and C only.
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada

14) As the federal government's fiscal agent the Bank of Canada provides ________
management services for the federal government.
A) debt
B) cost
C) financial
D) economic
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada

15) The Bank of Canada serves as a lender of last ________ when a deposit-taking financial
institution faces a ________ crisis.
A) resort; liquidity
B) minute; liquidity
C) resort; profitability
D) minute; profitability
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada

16) Because of its unique power to ________ base money, the Bank of Canada can ease the
liquidity problems of ________.
A) create; financial institutions
B) create; provincial governments
C) save; financial institutions
D) save; provincial governments
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada
17) Changes in the ________ lead to ________ changes in the money supply.
A) monetary base; multiple
B) monetary base; equal
C) inflation rate; multiple
D) inflation rate; equal
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada

18) Canada's national payments system currently clears and settles payments and transactions,
at a volume that is currently ________ times our annual GDP.
A) 15
B) 10
C) 5
D) 2
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada

19) The Bank of Canada's lender-of-last resort lending is coordinated with ________ and
________.
A) Office of the Superintendent of Financial Institutions Canada; Canada Deposit Insurance
Corporation
B) Office of the Superintendent of Financial Institutions Canada; the Department of Finance
C) the Department of Finance; Canada Deposit Insurance Corporation
D) Office of the Superintendent of Financial Institutions Canada; Canada Investment and
Savings
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada

20) In its responsibility for the government's operating accounts, the Bank of Canada
________.
A) shifts balances between accounts at the Bank of Canada and the banks
B) shifts balances between chartered banks
C) sells Canada Savings Bonds on behalf of the federal government
D) manages foreign exchange transactions
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada
21) The Bank of Canada's goal of low inflation is closely tied to ________.
A) economic growth
B) price volatility
C) low interest rates
D) growth in the money supply
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada

22) The purchase and sale of government securities by the Bank of Canada is known as
________.
A) open market buyback operations
B) repurchase agreements
C) interbank borrowing
D) monetary base transactions
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada

23) The Bank of Canada ultimate objective is ________.

A) price stability
B) to keep interest rates low
C) economic growth
D) low unemployment
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada

24) The responsibility of monetary policy in Canada was given by the 1967 Bank of Canada
Act to the ________.
A) government
B) Bank of Canada
C) provincial governments
D) parliament
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada
25) What are the main functions of the Bank of Canada? Describe them briefly.
Answer: The main functions of the Bank of Canada are:
a. Bank note issue: Since 1967 the Bank of Canada with the revision of the Bank Act was
provided with unlimited powers to issue legal tender. The Bank also tries to preserve the
integrity and safety of Canadian currency.
b. Government debt and asset management services: The Bank of Canada in its role as the
government's fiscal agent provides debt-management services for the federal government such
as advising on borrowings, managing new debt offerings and servicing outstanding debt.
c. Central banking services: The bank of Canada serves as the lender of last resort for the
deposit-taking financial institutions. It also plays a central role in Canada's national payments
system. Finally the Bank acts as the holder of deposit accounts for the government.
d. Monetary policy: The Bank of Canada employs tools such as open market operations to
conduct monetary policy. The Bank's ultimate objective is to keep inflation low so that steady
economic growth is achieved.
Diff: 3 Type: ES
Skill: Recall
Objective: 14.2 Describe the key features and functions of the Bank of Canada

14.4 How Independent is the Bank of Canada?

1) Instrument independence is the ability of ________ to set monetary policy ________.

A) the central bank; goals
B) Parliament; goals
C) Parliament; instruments
D) the central bank; instruments
Answer: D
Diff: 1 Type: MC
Skill: Recall
Objective: 14.3 Assess the degree of independence of the Bank of Canada

2) Economist Stanley Fisher defined two types of independence of central banks: ________ and
________ independence.
A) instrument; goal
B) policy; goal
C) instrument; political
D) parliamentary; decision
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 14.3 Assess the degree of independence of the Bank of Canada
3) The ability of a central bank to set monetary policy instruments is ________.
A) political independence
B) goal independence
C) policy independence
D) instrument independence
Answer: D
Diff: 1 Type: MC
Skill: Recall
Objective: 14.3 Assess the degree of independence of the Bank of Canada

4) Goal independence is the ability of ________ to set monetary policy ________.

A) the central bank; goals
B) Congress; goals
C) Congress; instruments
D) the central bank; instruments
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 14.3 Assess the degree of independence of the Bank of Canada

5) The ability of a central bank to set monetary policy goals is ________.

A) political independence
B) goal independence
C) policy independence
D) instrument independence
Answer: B
Diff: 1 Type: MC
Skill: Recall
Objective: 14.3 Assess the degree of independence of the Bank of Canada

6) Instrument independence is ________.

A) the ability of the central bank to set monetary policy goals
B) the ability of the government to set monetary policy goals
C) the ability of the government to set monetary policy instruments
D) the ability of the central bank to set monetary policy instruments
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 14.3 Assess the degree of independence of the Bank of Canada

7) Goal independence is ________.

A) the ability of the central bank to set monetary policy goals
B) the ability of the government to set monetary policy goals
C) the ability of the prime minister to set monetary policy instruments
D) the ability of the government to set monetary policy instruments
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.3 Assess the degree of independence of the Bank of Canada
8) The Bank of Canada enjoys ________.
A) instrument independence
B) political dependence
C) goal independence
D) A and C only.
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.3 Assess the degree of independence of the Bank of Canada

9) The Bank of Canada enjoys ________.

A) instrument independence
B) political independence
C) goal independence
D) A and B only.
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 14.3 Assess the degree of independence of the Bank of Canada

10) Under the current "joint responsibility system," ________.

A) in the event of a serious policy conflict the minister of finance can issue a directive that the
Bank of Canada must follow
B) the government accepts full responsibility for monetary policy
C) the Bank of Canada does not have considerable autonomy in the conduct of day-to-day
monetary policy
D) A and B only.
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 14.3 Assess the degree of independence of the Bank of Canada

11) Under the current "joint responsibility system," ________.

A) the Bank of Canada and the minister of finance consult regularly
B) in the event of a serious policy conflict the minister of finance can issue a directive that the
Bank of Canada must follow
C) the Bank of Canada has full responsibility for monetary policy
D) A and B only.
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 14.3 Assess the degree of independence of the Bank of Canada
12) Under the current "joint responsibility system," ________.
A) the Bank of Canada does not have considerable autonomy in the conduct of day-to-day
monetary policy
B) in the event of a serious policy conflict the minister of finance can issue a directive that the
Bank of Canada must follow
C) the government has no responsibility for the policy being followed by the Bank of Canada
D) the Bank of Canada has full responsibility for monetary policy
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 14.3 Assess the degree of independence of the Bank of Canada

13) Explain the joint responsibility system.

Answer: Under the joint responsibility system, the governor of the Bank of Canada and the
minister of finance, acting on behalf of the government, consult regularly and, in the event of a
serious disagreement over the conduct of monetary policy, the government has the right to
override the Bank's decisions. In particular, the minister of finance can issue a directive to the
Bank indicating the specific policy changes that the Bank must follow. The directive, however,
must be published indicating not only the new policy that the Bank is supposed to undertake
but also the period during which it is to apply.
Diff: 2 Type: ES
Skill: Recall
Objective: 14.3 Assess the degree of independence of the Bank of Canada

14.5 The Changing Face of the Bank of Canada

1) According to the performance of the Canadian economy, and the evolution of economic
theory, what is the most important goal of monetary policy?
A) Currency stability
B) Price stability
C) GDP growth
D) Employment growth
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 14.3 Assess the degree of independence of the Bank of Canada

2) Which goal has been set jointly by the Bank and the Department of Finance?
A) Currency stability
B) GDP growth
C) Price stability
D) Employment growth
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 14.3 Assess the degree of independence of the Bank of Canada
3) Increased operational independence by the Bank of Canada has also raised the standards for
________.
A) accountability
B) secrecy
C) misconduct
D) confusion
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.3 Assess the degree of independence of the Bank of Canada

4) What contributed to the move towards accountability and transparency of the Bank of
Canada?
Answer: The Bank's move towards accountability and transparency was motivated by a
number of recent trends in society and the economy. These have included economic
comprehension about interest rates, developments about targets and inflation, and greater
openness in the government.
Diff: 2 Type: ES
Skill: Applied
Objective: 14.3 Assess the degree of independence of the Bank of Canada

14.6 Should the Bank of Canada Be Independent?

1) The political business cycle refers to the phenomenon that just before elections, politicians
enact ________ policies. After the elections, the bad effects of these policies (for example,
________ ) have to be counteracted with ________ policies.
A) expansionary; higher unemployment; contractionary
B) expansionary; a higher inflation rate; contractionary
C) contractionary; higher unemployment; expansionary
D) contractionary; a higher inflation rate; expansionary
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 14.4 Summarize the arguments for and against the independence of the Bank of
Canada

2) The case for Bank of Canada independence includes the idea that ________.
A) a politically insulated Bank of Canada would be more concerned with long-run objectives
and thus be a defender of a sound dollar and a stable price level
B) a Bank of Canada under the control of the government might make the so-called political
business cycle more pronounced
C) the principal-agent problem is perhaps worse for the Bank than for politicians since the
former does not answer to the voters on election day
D) A and B only.
Answer: D
Diff: 3 Type: MC
Skill: Recall
Objective: 14.4 Summarize the arguments for and against the independence of the Bank of
Canada
3) Which of the following statements concerning an independent central bank are true?
A) Politicians may prefer an independent central bank, as it can be used as a "whipping boy" or
"scapegoat" for poor economic performance.
B) Politicians in a democratic society may be shortsighted because of their desire to win
reelection; thus, the political process may generate a political business cycle, in which just
before an election contractionary policies are pursued to raise unemployment and interest rates.
C) Putting the Bank of Canada under control of the government may place too much pressure
on the Bank of Canada to finance federal budget deficits, thereby imparting an inflationary bias
to monetary policy.
D) A and C only
Answer: D
Diff: 3 Type: MC
Skill: Recall
Objective: 14.4 Summarize the arguments for and against the independence of the Bank of
Canada

4) Which of the following statements concerning an independent central bank are true?
A) Politicians may prefer an independent central bank, as it can be used as a "whipping boy" or
"scapegoat" for poor economic performance.
B) Politicians in a democratic society may be shortsighted because of their desire to win
reelection; thus, the political process may generate a political business cycle, in which just
before an election expansionary policies are pursued to lower unemployment and interest rates.
C) Putting the Bank of Canada under control of the government may place too much pressure
on the Bank to finance federal budget deficits, thereby imparting an inflationary bias to
monetary policy.
D) All of the above are true statements.
Answer: D
Diff: 3 Type: MC
Skill: Recall
Objective: 14.4 Summarize the arguments for and against the independence of the Bank of
Canada

5) The systematic and permanent differences in macroeconomic outcomes that differ by

political party are known as ________ business cycles.
A) partisan
B) electoral
C) real
D) nominal
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.4 Summarize the arguments for and against the independence of the Bank of
Canada
6) Advocates of Bank of Canada independence fear that subjecting the Bank to direct
government control would ________.
A) impart an anti-inflationary bias to monetary policy
B) force monetary authorities to sacrifice the long-run objective of price stability
C) make the so-called political business cycle even more pronounced
D) B and C only.
Answer: D
Diff: 3 Type: MC
Skill: Recall
Objective: 14.4 Summarize the arguments for and against the independence of the Bank of
Canada

7) The strongest argument for an independent Bank of Canada rests on the view that subjecting
the Bank to more political pressures would impart ________.
A) an inflationary bias to monetary policy
B) a deflationary bias to monetary policy
C) a disinflationary bias to monetary policy
D) a countercyclical bias to monetary policy
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.4 Summarize the arguments for and against the independence of the Bank of
Canada

8) Supporters of the current system of Bank of Canada independence believe that a less
autonomous Bank would ________.
A) adopt a short-run bias toward policymaking
B) pursue overly expansionary monetary policies
C) be more likely to create a political business cycle
D) do each of the above
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 14.4 Summarize the arguments for and against the independence of the Bank of
Canada

9) The strongest argument for an independent Bank of Canada rests on the view that subjecting
the Bank to more political pressures would impart ________.
A) an inflationary bias to monetary policy
B) a deflationary bias to monetary policy
C) a disinflationary bias to monetary policy
D) a countercyclical bias to monetary policy
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.4 Summarize the arguments for and against the independence of the Bank of
Canada
10) Politicians in a democratic society may be shortsighted because of their desire to win
reelection; thus, the political process can ________.
A) impart an inflationary bias to monetary policy
B) impart a deflationary bias to monetary policy
C) generate a political business cycle, in which just before an election expansionary policies are
pursued to lower unemployment and interest rates
D) cause A and C only
Answer: D
Diff: 3 Type: MC
Skill: Recall
Objective: 14.4 Summarize the arguments for and against the independence of the Bank of
Canada

11) Putting the Bank of Canada under control of the government ________.
A) may place too much pressure on the Bank of Canada to finance federal budget deficits
B) impart an inflationary bias to monetary policy
C) generate a political business cycle, in which just before an election contractionary policies
are pursued to raise unemployment and interest rates
D) may cause A and B only
Answer: D
Diff: 3 Type: MC
Skill: Recall
Objective: 14.4 Summarize the arguments for and against the independence of the Bank of
Canada

12) Critics of the current system of Bank of Canada independence contend that ________.
A) the current system is undemocratic
B) voters have too much say about monetary policy
C) the governor has too much control over monetary policy on a day-today basis
D) B and C only.
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.4 Summarize the arguments for and against the independence of the Bank of
Canada

13) The case for Bank of Canada independence does not include the idea that ________.
A) political pressure would impart an inflationary bias to monetary policy
B) a politically insulated Bank would be more concerned with long-run objectives and thus be a
defender of a sound dollar and a stable price level
C) a Bank of Canada under the control of the government might make the so-called political
business cycle more pronounced
D) the principal-agent problem is perhaps worse for the Bank of Canada than for politicians
since the former does not answer to the voters on election day
Answer: D
Diff: 3 Type: MC
Skill: Recall
Objective: 14.4 Summarize the arguments for and against the independence of the Bank of
Canada
14) Critics of Bank of Canada independence argue ________.
A) that it is undemocratic to have monetary policy controlled by an elite group responsible to
no one
B) that an independent Bank of Canada conducts monetary policy with a consistent inflationary
bias
C) that the Bank of Canada, since it does not face a binding budget constraint, spends too much
of its earnings
D) A and B only.
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.4 Summarize the arguments for and against the independence of the Bank of
Canada

15) Recent research indicates that inflation performance (low inflation) has been found to be
best in countries with ________.
A) the most independent central banks
B) political control of monetary policy
C) money financing of budget deficits
D) a policy of always keeping interest rates low
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.4 Summarize the arguments for and against the independence of the Bank of
Canada

16) Recent research indicates that inflation performance (low inflation) has been found to be
best in countries with ________.
A) the most independent central banks
B) the least independent central banks
C) political control of monetary policy
D) a policy of always keeping interest rates low
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.4 Summarize the arguments for and against the independence of the Bank of
Canada

17) Recent research has found that countries with the most independent central banks have
experienced ________.
A) the lowest average rates of inflation
B) rates of inflation no different from countries with less independent central banks
C) the highest average rates of inflation
D) high inflation from financing deficits
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.4 Summarize the arguments for and against the independence of the Bank of
Canada
18) Countries with the most independent central banks have low inflation ________.
A) but have higher unemployment than countries with less independent central banks
B) but have higher output fluctuations than countries with less independent central banks
C) and have lower rates of unemployment than countries with less independent central banks
D) but have no higher unemployment or output fluctuations than countries with less
independent central banks
Answer: D
Diff: 3 Type: MC
Skill: Recall
Objective: 14.4 Summarize the arguments for and against the independence of the Bank of
Canada

19) How do political cycles influence aggregate economic activity?

Answer: We distinguish between two types of political cycles:
a. electoral business cycles: politicians maximize their popularity or their probability of re-
election by following pre-election expansionary fiscal policies in order to please the voters.
These give rise to persistent cyclical patterns of key policy and target variable across electoral
terms, regardless of the political orientation of the incumbent government.
b. partisan business cycles: systematic and permanent differences in macroeconomic outcomes
that differ by political party. In this case politicians are ideological; they represent the interests
of different pressure groups and, when in office, follow policies which are favorable to their
supporting groups.
Diff: 2 Type: ES
Skill: Recall
Objective: 14.4 Summarize the arguments for and against the independence of the Bank of
Canada

20) Explain two concepts of central bank independence. Is the Bank of Canada politically
independent? Why do economists think central bank independence is important?
Answer: Instrument independence is the ability of the central bank to set its instruments, and
goal independence is the ability of a central bank to set its goals. The Bank of Canada enjoys
instrument independence but not goal independence because of the "joint responsibility
system." Independence is important because there is some evidence that independent central
banks pursue lower rates of inflation without harming overall economic performance.
Diff: 3 Type: ES
Skill: Recall
Objective: 14.4 Summarize the arguments for and against the independence of the Bank of
Canada
14.7 Explaining Central Bank Behaviour

1) The theory of bureaucratic behaviour suggests that the objective of a bureaucracy is to

maximize ________.
A) the public's welfare
B) profits
C) its own welfare
D) conflict with the executive and legislative branches of government
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 14.5 Identify the ways in which the theory of bureaucratic behaviour can help explain
central bank actions

2) The theory of bureaucratic behavior suggests that a consumer's behaviour is motivated by the
________.
A) maximization of personal welfare
B) maximization social welfare
C) minimization of government intervention
D) minimization political pressure
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.5 Identify the ways in which the theory of bureaucratic behaviour can help explain
central bank actions

3) The theory of bureaucratic behaviour suggests that the Bank of Canada will fight ________.
A) to preserve the public's welfare
B) to maximize profits
C) minimize its own welfare
D) to preserve autonomy
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 14.5 Identify the ways in which the theory of bureaucratic behaviour can help explain
central bank actions

4) What is the theory of bureaucratic behavior and how can it be used to explain the behavior of
the Bank of Canada?
Answer: The theory of bureaucratic behavior concludes that the main objective of any
bureaucracy is to maximize its own welfare, which is related to power and prestige. This can
explain why the Bank of Canada has defended its autonomy, and will avoid conflict with
powerful groups that might threaten to curtail its power and reduce its autonomy.
Diff: 1 Type: ES
Skill: Recall
Objective: 14.5 Identify the ways in which the theory of bureaucratic behaviour can help explain
central bank actions
14.8 Structure and Independence of Foreign Central Banks

1) Which of the following is not an entity of the Federal Reserve System?

A) Federal Reserve Banks
B) The FDIC
C) The Board of Governors
D) The Board of Advisors
Answer: D
Diff: 1 Type: MC
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world

2) Which of the following are entities of the Federal Reserve System?

A) Federal Reserve Banks
B) The FOMC
C) The Board of Advisors
D) A and B only
Answer: D
Diff: 3 Type: MC
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world

3) Which of the following are entities of the Federal Reserve System?

A) Federal Reserve Banks
B) The FDIC
C) The Board of Advisors
D) A and B only
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world

4) The board of governors members of the federal reserve system in the U.S. are appointed by
the ________ and confirmed by the ________.
A) president; senate
B) president; house of representatives
C) senate; president
D) house of representatives; president
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world
5) According to the authors of your textbook, the Federal Reserve is ________.
A) remarkably free of the political pressures that influence other government agencies
B) more responsive to the political pressures that influence other government agencies
C) constrained in its policy making by the congressional threat to reduce Fed independence
D) A and C only.
Answer: A
Diff: 3 Type: MC
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world

6) According to the author of your textbook, the Federal Reserve is ________.

A) remarkably free of the political pressures that influence other government agencies
B) more responsive to the political pressures that influence other government agencies
C) probably somewhat constrained in its policy making by the congressional threat to reduce
Fed independence
D) A and C only.
Answer: D
Diff: 3 Type: MC
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world

7) The European Central Bank is located in ________.

A) Frankfurt
B) London
C) Paris
D) Rome
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world

8) The Executive Board of the European Central Bank ________.

A) consists of the European Central Bank's president, vice president, and four other members
B) is responsible for the business of the European Central Bank
C) is responsible for the implementation of monetary policy in accordance with the guidelines
set by the Governing Council
D) All of the above.
Answer: D
Diff: 3 Type: MC
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world
9) The Eurosystem has a structure like that of the ________.
A) Bank of Canada
B) Federal Reserve System
C) Bank of England
D) Swiss National Bank
Answer: B
Diff: 1 Type: MC
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world

10) The Maastricht Treaty which established the European Central Bank, defined price stability
as an inflation rate equal to ________.
A) It did not specify exactly.
B) 0 percent
C) 1 percent
D) 2 percent
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world

11) Which of the following are entities of the Eurosystem?

A) The European Central Bank
B) The central banks of the European Union countries that have adopted the euro
C) The central banks of the euro area countries and of the European Union countries that have
not yet adopted the euro
D) A and B only
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world

12) Which of the following are entities of the Eurosystem?

A) The European Central Bank
B) National finance ministries in each country
C) The Governing Council of the European Central Bank
D) A and C only
Answer: D
Diff: 1 Type: MC
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world
13) Regarding central bank independence, ________.
A) the Fed is more independent than the European Central Bank
B) the European Central Bank is more independent than the Fed
C) the trend in industrialized nations has been to reduce central bank independence
D) the Bank of England has the longest tradition of independence of any central bank in the
world
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world

14) Of the major central banks of the world, the most independent is ________.
A) the Federal Reserve System
B) the European Central Bank
C) the Bank of Canada
D) the Bank of England
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world

15) The oldest central bank, having been founded in 1694, is the ________.
A) Bank of England
B) Deutsche Bundesbank
C) Bank of Japan
D) Federal Reserve System
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world

16) Which of the following statements are true of the Bank of England?
A) The Bank of England was established in 1919.
B) The governor and four deputy governors comprise the monetary policy making body.
C) Until 1997, the decision to raise or lower interest rates resided not with the Bank of England
but with the chancellor of the Exchequer.
D) B and C only.
Answer: C
Diff: 3 Type: MC
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world
17) Which of the following statements are true of the Bank of England?
A) The Bank of England was established in 1894.
B) Until 1997, the decision to raise or lower interest rates resided not with the Bank of England
but with the chancellor of the Exchequer.
C) The government can overrule the Bank and set rates "in extreme economic circumstances"
and "for a limited period."
D) B and C only.
Answer: D
Diff: 3 Type: MC
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world

18) While legislation enacted in 1998 granted the Bank of Japan new powers and greater
autonomy, its critics contend that its independence is ________.
A) limited by the Ministry of Finance's control over a portion of its budget
B) too great because it need not pursue a policy of price stability even if that is the popular will
of the people
C) too great since the Ministry of Finance no longer has veto power over the bank's budget
D) limited since the Ministry of Finance can dismiss senior bank officials
Answer: A
Diff: 3 Type: MC
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world

19) The Bank of Japan was founded in ________.

A) 1882
B) 1922
C) 1932
D) 1952
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world

20) The trend in recent years is that more and more governments ________.
A) have been granting greater independence to their central banks
B) have been reducing the independence of their central banks to make them more accountable
for poor economic performance
C) have mandated that their central banks focus on controlling inflation
D) have required their central banks to cooperate more with their Ministers of Finance
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world
21) Which of the following statements about central bank structure and independence are true?
A) In recent years, with the exception of the Bank of England and the Bank of Japan, most
countries have reduced the independence of their central banks, subjecting them to greater
democratic control.
B) Before the Bank of England was granted greater independence, the Federal Reserve was the
most independent of the world's central banks.
C) Both theory and experience suggest that more independent central banks produce better
monetary policy.
D) While the European Central Bank is independent, it is not as independent as the Federal
Reserve.
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world

22) Which of the following statements about central bank structure and independence are NOT
true?
A) In recent years, with the exception of the Bank of England and the Bank of Japan, most
countries have reduced the independence of their central banks, subjecting them to greater
democratic control.
B) Before the Bank of England was granted greater independence, the Federal Reserve was the
most independent of the world's central banks.
C) Both theory and experience suggest that more independent central banks produce better
monetary policy.
D) A and B only
Answer: D
Diff: 3 Type: MC
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world

23) Which of the following statements about central bank structure and independence are true?
A) In recent years there has been a remarkable trend toward increasing independence.
B) In recent years, greater independence has been granted to many central banks, with the
exception of the Bank of England and the Bank of Japan, which are still subject to strict
governmental control.
C) In theory, central banks subject to government control produce better monetary policy, but
experience suggests that more independent central banks have produced superior monetary
policy results.
D) A and B only
Answer: A
Diff: 3 Type: MC
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world
24) Why did the Governing Counsel of the ECB decided to operate by consensus?
Answer: Although its members have the legal right to vote, no formal vote is actually taken in
the Governing Counsel and decisions are reached by consensus. One reason for that is because
of worries that the casting of individual votes might lead to heads of National Central Banks
supporting a monetary policy that would be appropriate for their individual countries, but not
necessarily for the countries in the European Monetary Union as a whole.
Diff: 2 Type: ES
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world

25) What are the main differences between the European system of Central Banks and the
Federal Reserve System?
Answer: Although their structure is similar some important differences distinguish the two:
a. the budgets of the Federal Reserve Banks are controlled by the Board of Governors, while
the National Central Banks control their own budgets and the budget of the ECB in Frankfurt.
b. the monetary operations of the Eurosystem are conducted by all the National Central Banks
in each country so that monetary operations are not centralized as they are in the Federal
Reserve System.
c. in contrast to the Federal Reserve the ECB is not involved in supervision and regulation of
financial institutions; these tasks are left to the individual countries.
Diff: 3 Type: ES
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world

26) Describe the function and structure of the board of governors of the federal reserve system.
Answer: At the head of the federal Reserve System is the seven-member Board of Governors,
headquartered in Washington D.C. Each governor is appointed by the president of the U.S. and
confirmed by the Senate. The governors can serve one nonrenewable 14-year term plus part of
another term, with one governor's term expiring every other January. The chairman of the
Board of Governors is chosen from among the seven governors and serves a 4-year term.
Diff: 2 Type: ES
Skill: Recall
Objective: 14.6 Discuss the structure and independence of other major central banks around the
world