the economics of money, banking, and financial markets

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4. 
   

   Because prices are sticky in the short-run, when the Bank of Canada raises the overnight rate,
   ____.
   A) nominal interest rates fall
   B) real interest rates rise
   C) inflation falls
   D) real interest rates fall
   Answer: B
   Diff: 2 Type: MC Page Ref: 558
   Skill: Recall
   Objective List: 23.1 Apply the IS-MP framework for the determination of aggregate output and
   the interest rate

   
   


5. 
   

   Explain the relationship between Bank of Canada's overnight rate and the real interest rate.
   Answer: Because prices are sticky–changes in monetary policy will not have an immediate
   effect on inflation and expected inflation. As a result, when the Bank of Canada lowers the
   overnight interest rate, real interest rates fall; and when the Bank of Canada raises the overnight
   rate, real interest rates rise.
   Diff: 2 Type: SA Page Ref: 559
   Skill: Recall
   Objective List: 23.1 Apply the IS-MP framework for the determination of aggregate output and
   the interest rate

   
   


6. 
   

   Explain the relationship between real and nominal interest rates when inflation is expected to
   remain unchanged in the short run.
   Answer: The Fisher equation states that real interest rate equals the nominal interest rate minus
   expected inflation. If there is no change in expected inflation, then over the short run, the real
   and nominal rates will be the same.
   Diff: 2 Type: SA Page Ref: 559
   Skill: Recall
   Objective List: 23.1 Apply the IS-MP framework for the determination of aggregate output and
   the interest rate