Question

Fill in the blanks to make the following statements correct. a The interest rate that commercial banks charge each other for overnight loans is called the overnight interest rate. b. The bank rate is 50 basis points above the target overnight interest rate. At this interest rate, the Bank stands ready to lend any amount to commercial banks. At a rate 50 basis points below the target, the Bank stands ready to accept deposits from commercial banks (and pay that rate of interest). (Round your responses to the nearest basis point.) c. The Bank of Canada can change the amount of currency in circulation through conducts these transactions to accommodate the changing demand for The Bank by the commercial banks. d. A contractionary monetary policy is one where the Bank of Canada its target for the overnight interest rate. e. If the Bank of Canada wants to dampen aggregate demand, it can implement its target for the overnight interest rate monetary policy by

Answer 1

a. The interest rate that commercial banks change each other for overnight loans is called the overnight interest rate.

Note: The overnight interest rate is the interest rate charged by the commercial banks when it gives lend to other banks or takes borrow from other commercial banks and this rate is decided by demand and supply of overnight cash of the banks.

b. The bank rate is 50 basis points above the target overnight rate. At this interest rate, the Bank stands ready to lend any amount to commercial banks. At a rate 50 basis points below the target, the Bank stands ready to accept deposits from commercial banks (and pay that rate of interest).

Note: Bank rate is generally 50 basis points above the target overnight interest rate and Bank can give deposits any amount 50 basis points below the target overnight interest rate.

c. The bank of Canada can change the amount of currency in circulation through open market operations and target overnight interest rate. The bank conducts these transactions to accommodate the changing demand for currency by the commercial banks.

Note: Through open market operations and target for overnight interest rate Bank of Canada control the money supply. But Bank of Canada does not initiate open market operations because it conducts them to accommodate currency in circulation.

d. A contractionary monetary policy is one where the Bank of Canada increases its target for the overnight interest rate.

Note: Through increase in target overnight interest rate the money supply can reduce. Bank of Canada generally apply this to control money supply.

e. If the Bank of Canada wants to dampen aggregate demand, it can implement contractionary monetary policy by increasing its target for the overnight interest rate.