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© 2014 Pearson Canada Inc.#
In the market for reserves, market equilibrium occurs where the ____.
A) quantity of reserves demanded equals the quantity supplied
B) quantity of reserves demanded is above the quantity supplied
C) quantity of reserves demanded is below the quantity supplied
D) quantity of reserves demanded does not equal the quantity supplied
Answer: A
Diff: 1 Type: MC Page Ref: 410
Skill: Recall
Objective List: 17.2 Explain the market for reserves and the channel/corridor system for setting
the overnight interest rate in Canada
The channel/corridor system for setting interest rates ____.
A) is not appropriate for Canadian monetary policy
B) limits the amount banks can borrow from the central bank
C) enables the central bank to set the overnight, policy rate
D) is being phased out as a monetary policy tool
Answer: C
Diff: 1 Type: MC Page Ref: 410 - 411
Skill: Recall
Objective List: 17.2 Explain the market for reserves and the channel/corridor system for setting
the overnight interest rate in Canada
Explain why the bank rate is an upper limit for the overnight rate.
Answer: Anytime the overnight rate is below the bank rate, banks are going to borrow money
from each other in order to minimize their settlement balances with the bank of Canada. When
the overnight rate starts to rise and exceeds the bank rate, then banks will be able to borrow as
many funds as they require from the Bank of Canada by being charged the bank rate instead of
the overnight rate that is now higher. Thus the bank rate is a ceiling for the overnight rate,
Diff: 2 Type: SA Page Ref: 410 - 411
Skill: Applied
Objective List: 17.1 Characterize the framework for the implementation of monetary policy in
Canada
Explain why the bank rate minus 50 basis points (ib-50) is the lower limit for the overnight
rate.
Answer: When demand for reserves falls and the overnight rate tends to fall below the ib- 50
rate, then the banks with excess reserves are better off leaving their credit (positive) balances
with the LVTS where they will get an interest rate of ib-50. Thus the overnight interest rate can
never fall below this point.
Diff: 3 Type: SA Page Ref: 410 - 411
Skill: Applied
Objective List: 17.1 Characterize the framework for the implementation of monetary policy in
Canada