Intermediate Macro ll > Midterm 2 Flashcards > Flashcards

Midterm 2 Flashcards

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1
Q

The price of a currency stated in terms of another is called

A

the nominal ER

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2
Q

Since 1945 what has countries agreed to do

A

Keep the price of their home currencies fixed against USD

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3
Q

Until what year was the US backed by gold

A

1971

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4
Q

USD currency is also known as the

A

anchor currency

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5
Q

USD is used as 2 things in international trade and finance

A

1) Medium of exchange
2) Unit of account

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6
Q

In 2024-2025
___ of total international debt securities outstanding issued were in USD

A

60%

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7
Q

___ of reserve assets held globally were in USD

A

60%

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8
Q

___ of international money transfer were in USD

A

60%

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9
Q

How much USD of the us treasury bonds were held by the rest of the world in July 2025

A

9 trillion USD

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10
Q

BoC’s main monetary policy objective is…

A

keeping the inflation rate low

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11
Q

BoC’s main monetary policy tool is

A

is the policy interest rate

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12
Q

The 5 tool used are:

A

1) overnight rate
2) policy interest rate
3) Bank rate
4) Deposit rate
5) Operating band

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13
Q

Lynx is also known as

A

Canadas high-value payment system

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14
Q

what is lynx?

A

It is an electronic system that facilitates the irrevocable transfer of payments in CAD and between participating financial insituations

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15
Q

Who is lynx owned by?

A

Payments Canada

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16
Q

When did lynx start operations and what did it replace?

A

August 30th, 2021 and replaced Large value Transfer System

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17
Q

On typical day how many transactions did lynx process?

A

49000 transfer worth $210 billion

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18
Q

What does lynx help with?

A

Helps the bank of Canada reinforce the policy IR by managing the amount of liquidity in the financial system

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19
Q

What do participants of the LYNX have to do at the end of day?

A

need to settle all payments

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20
Q

Interbank is also known as the

A

Overnight market

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21
Q

Interbank loans are usually for

A

Overnight loans( for one night) and borrowing banks

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22
Q

What is the starting point for setting interest rates

A

overnight rate

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23
Q

True or false
“Banks do not have to borrow from each other to balance payments”

A

True

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24
Q

True or False
Banks that are short on settlements can borrow from the bank of Canada

A

True

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25
What is the rate called that the BoC charge on these other banks
Bank rate
26
True or False The BoC sets the bank rate to be high than policy IR
True
27
True or False Banks with extra settlements HAVE to lend to banks that are short
False
28
What do banks with extra settlements do?
The keep these balance deposited at the BoC
29
What is interest rate called when the BoC pays banks for the deposits they keep at the BoC
Deposit rate
30
The BoC sets the deposit rate less than or equal to what
the policy interest rate
31
What is the operating band?
the difference between the Bank rate and the deposit rate
32
Why does the BoC set the Bank Rate to be higher than the policy interest rate
To encourage short banks to borrow from other banks first at a lower OR
33
Why would the BoC set the DR to be less than the policy interest rate
Encourage banks with extra settlements to lend the extra balances to short banks
34
When banks encourage banks with extra settlement to lend to short banks, what system was it?
Corridor System
35
When banks encourage short banks to borrow from other banks first, what system what it?
Floor system
36
Under a corridor system BoC used to target what settlement balance
Zero
37
What is the Bank of Canada’s main conventional monetary policy tool?
The policy interest rate.
38
What is the zero lower bound in Canada?
0.25%.
39
When does the zero lower bound usually occur?
During major economic crises (e.g., COVID-19).
40
What is Quantitative Easing (QE)?
Large-scale purchases of government bonds by the Bank of Canada to stimulate the economy.
41
What type of bonds does the BoC buy during QE?
Medium-term and long-term government bonds in the secondary market.
42
How does the BoC pay for bonds during QE?
By creating settlement balances (increasing liquidity).
43
What are the two main goals of QE?
1) Lower long-term interest rates 2) Increase banking system liquidity
44
What is a bond?
A fixed-income security used by governments or corporations to borrow money.
45
What is the face value of a bond?
The amount repaid to the bondholder at maturity.
46
What is a coupon payment?
Regular interest payment equal to coupon rate × face value.
47
What is Yield to Maturity (YTM)?
The total return if a bond is held until maturity.
48
What is the relationship between bond price and YTM?
Inverse relationship.
49
If bond prices increase, what happens to YTM?
YTM decreases.
50
Why does QE lower mortgage rates?
Lower government bond yields reduce benchmark interest rates.
51
Why are government bond yields important?
They serve as benchmarks for other interest rates in the economy.
52
What was the operating band under the corridor system?
50 basis points (0.5%).
53
What were settlement balances under the corridor system?
Near zero.
54
What was unique about the floor system (2020–2025)?
Deposit rate equaled policy rate and settlement balances were large.
55
What is the operating band under the modified floor system (2025–present)?
30 basis points (0.30%).
56
Why was the deposit rate lowered slightly below the policy rate in 2025?
To encourage banks with excess balances to lend to short banks.
57
Why are settlement balances important?
They determine banks’ need to borrow in the overnight market.
58
What would happen if the overnight market rate rose above the bank rate?
Banks would borrow from the Bank of Canada instead, pushing the market rate back down.
59
What would happen if the overnight market rate fell below the deposit rate?
Banks would deposit funds at the BoC instead of lending, pushing the overnight rate back up
60
Why did the BoC switch to a floor system in March 2020?
To provide abundant liquidity during economic crisis (COVID-19).
61
If the policy rate is 4%, what would the bank rate be under the modified floor system?
4.25% (25 basis points higher).
62
What is the “ceiling” of the operating band?
The bank rate.
63
What determines output in the short run?
Aggregate demand.
64
What is the formula for aggregate demand?
𝐴𝐷=𝐶+𝐼+𝐺+𝑁𝑋.
65
What is a monetary shock?
A change in the money supply that affects AD.
66
Why do we use the AS–AD model?
To understand how the economy reacts to shocks.
67
Why is SRAS upward sloping?
Sticky wages and sticky prices.
68
What is the approximate slope of SRAS in Canada?
45–55%.
69
What type of shock shifts SRAS?
Temporary shocks
70
What type of shock shifts LRAS?
Permanent shocks.
71
What are conditional monetary policy rules?
Policies that adjust interest rates based on economic conditions.
72
What is the operating band?
The interest rate range targeted by the Bank of Canada.
73
Does the Central Bank permanently affect potential output?
No—potential output and the natural rate are not permanently affected.
74
What happens when the CB cuts interest rates?
Loans ↑, money supply ↑, production ↑
75
What happens when the CB raises interest rates?
Loans ↓, money supply ↓, production ↓.
76
How does the CB increase the money supply using bonds?
By buying government bonds.
77
How does the CB decrease the money supply using bonds?
By selling government bonds.
Intermediate Macro ll
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