CHAPTER 17 Tools of Monetary Policy 461 During the holiday season, when the public s holdings of currency increase, what open market operations typically occur? Why? *9 Last-resort lending is no longer needed because the presence of the CDIC eliminates the possibility of bank panics Discuss *3 If the government has just paid for major computer upgrades and as a result its deposits with the Bank of Canada fall, what open market operations could be undertaken? 10 The benefits of using last-resort lending to prevent bank panics are straightforward What are the costs? In the LVTS environment, government deposit shifting is effected by auctions of government balances Discuss *5 Most open market operations are currently repurchase agreements What does this tell us about the likely volume of open market operations relative to dynamic open market operations? *11 You often read in the newspaper that the Bank of Canada has just lowered the target overnight rate Does this signal that the Bank is moving to a more expansionary monetary policy? Why or why not? 12 How can the procyclical movement of interest rates (rising during business cycle expansions and falling during business cycle contractions) lead to a procyclical movement in the money supply as a result of the Bank of Canada s lending policy? Why might this movement of the money supply be undesirable? The only way that the Bank of Canada can affect the level of advances is by adjusting the bank rate Is this statement true, false, or uncertain? Explain your answer *13 Explain how repos and reverse repos affect the overnight rate *7 If the Bank of Canada did not administer the operating band what you predict would happen to the money supply if the bank rate were several percentage points below the overnight rate? 14 The channel/corridor system for setting interest rates enables the Bank of Canada to set the overnight rate whatever the demand for reserves, including zero demand Discuss Discuss how the operating band affects interest rates and the money supply in the economy *15 Compare the use of open market operations and government deposit shifting to control the money supply, using the following criteria: flexibility, reversibility, effectiveness, and speed of implementation Q U A N T I TAT I V E P R O B L E M CANSIM Question Get the daily CANSIM data from January 2, 1996, to November 11, 2009, for the bank rate (series V39078) and the target overnight rate (series V39079) from the Textbook Resources area of the MyEconLab a What is the difference between the two series? b Plot the two series c Calculate the upper and lower bounds of the operating band and plot the time path of the operating band d What does the time path of the operating band say about the easiness of monetary policy over this period? WEB EXERCISES Go to www.bankofcanada.ca and click on Media Room and then Press Releases Scroll down and click on the release regarding recent changes in the overnight rate of interest Summarize the statement in one paragraph Be sure to note whether the bank rate was increased or decreased Now review the changes in the operating band for the overnight interest rate in the previous two press releases regarding this issue Has the stance of monetary policy changed? Refer to Figure 17-1 on page 434 Go to www.bankofcanada.ca and scroll down on Rates and Statistics What is the current overnight rate target? What is the overnight rate? Is the difference between them what you would expect it to be? Be sure to visit the MyEconLab website at www.myeconlab.com.This online homework and tutorial system puts you in control of your own learning with study and practice tools directly correlated to this chapter content