Canadian Securities Course (CSC) Level 1 Practice Exam

What are the key monetary policy tools?

1. Bank Rate

2. Inflation Targeting

3. Interest Rates and Money Supply

4. Quantitative Easing

The correct answer is: Interest Rates and Money Supply

The key monetary policy tools primarily include interest rates and money supply. These tools are utilized by central banks, such as the Bank of Canada, to influence the overall economic activity and ensure price stability. Interest rates, specifically, can be manipulated to either encourage borrowing and spending (when rates are lowered) or to cool down an overheated economy (when rates are increased). By adjusting the policy interest rate, the central bank effectively influences the cost of borrowing for consumers and businesses, which in turn affects spending, investment, and ultimately economic growth. Money supply refers to the total amount of monetary assets available in an economy at a specific time. Central banks can control the money supply through several methods, including open market operations—buying or selling government securities to add or remove liquidity from the banking system. When the money supply increases, it typically lowers interest rates, fostering borrowing and spending. While options like the Bank Rate and Quantitative Easing are indeed tools used in certain scenarios, they fit within the broader categories of interest rates and money supply. Inflation targeting is more of a framework or strategy that guides how monetary policy is conducted rather than a specific tool. Hence, the focus on interest rates and money supply encompasses the fundamental mechanisms through which monetary policy aims to