3 when the governments deposits at the bank of canada

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3. When the government’s deposits at the Bank of Canada fall, the monetary base increases. Tocounteract this increase, the manager would undertake an open market sale.4. In the pre-LVTS system, government deposit shifting was effected by the Bank's daily cash setting.In the LVTS environment, however, the cash setting mechanism is not a practical tool forgovernment deposit shifting. Morning and afternoon auctions of government term deposits are usedto effect the transfer.5. It suggests that defensive open market operations are far more common than dynamic operationsbecause repurchase agreements are used primarily to conduct defensive operations to counteracttemporary changes in the monetary base.6. False. Adjustments in the bank rate do not affect the level of advances in the current Canadianinstitutional framework within which monetary policy is conducted. This statement would be truefor the Federal Reserve in the United States, however. In fact the Fed can also affect the level ofdiscount loans by directly limiting the amount of discount loans an individual bank can have.7. The monetary base and the money supply would increase indefinitely. Banks could borrow at thelower bank rate and then lend the proceeds at a higher interest rate. Hence banks would make aprofit on every dollar borrowed from the Bank of Canada, so they would continue to borrowindefinitely --- which would in turn increase the monetary base indefinitely.8. A rise in the operating band increases short-term interest rates in the economy. This reduces themonetary base and the money supply. On the other hand, a fall in the operating band decreasesshort-term interest rates and increases the monetary base and the money supply.9. This statement is incorrect. The CDIC would not be effective in eliminating bank panics withoutcentral bank lending to troubled banks in order to keep bank failures from spreading.10. The costs are that banks that deserve to go out of business because of poor management may survivebecause of Bank of Canada lending to prevent panics. This might lead to an inefficient bankingsystem with many poorly run banks.11. Usually yes, since declines in the bank rate occur because the operating band for the overnight ratehas been lowered.12. When interest rates rise during a boom, the spread between market interest rates and the bank rate
usually rises and the level of Bank of Canada advances increases. The result is a rise in the monetary baseand the money supply during a boom. Similarly, during a recession, when interest rates rise, thelevel of Bank of Canada lending falls, which reduces the monetary base.13. In a repo, the Bank of Canada buys government of Canada securities from participants with anagreement ro resell them on the next business day. The Bank pays for the repos by crediting theparticipant’s account at the Bank, thereby increasing settlement balances. This increase insettlement balances puts downward pressure on the overnight interest rate, as banks would have toborrow less to meet their settlement requirements. In a reverse repo, the Bank of Canada sells

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