The Diagrams Below Illustrate Two Alternative Approaches to Implementing Monetary

question 89

Multiple Choice

The diagrams below illustrate two alternative approaches to implementing monetary policy.The economy begins in monetary equilibrium with the interest rate equal to 2% and the money supply equal to . FIGURE 28-1
-Refer to Figure 28-1.The Bank of Canada must be able to easily communicate its monetary policy actions to the public.Which approach is more amenable to this requirement,and why?

• A)part (ii)- targeting the money supply: because an announcement of a 1% decrease in the money supply is more easily understood than an increase in the interest rate.
• B)part (i)- targeting the interest rate: because the Bank of Canada can more easily instruct the commercial banks to raise their interest rates.
• C)part (ii)- targeting the money supply: because the public can more easily understand that a decrease in reserves in the banking system makes it more difficult to get a loan or mortgage.
• D)part (i)- targeting the interest rate: because changes in the interest rate are much more meaningful and understandable to the public than changes in the money supply.

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Definitions:

Current Liabilities

Liabilities due within a short period, typically less than a year, that are supposed to be paid out of current assets.

Debt to Equity Ratio

A financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company’s assets.

Total Liabilities

This term represents the aggregate of all debts and financial obligations owed by an entity to outside parties at any given point in time.

Stockholders' Equity

The residual interest in the assets of a corporation after deducting liabilities, representing the ownership interest of shareholders.