Which of the following situations illustrates how monetary policy can influence aggregate demand?
A)Investors, anticipating an erosion of financial wealth due to inflation, decide to save more.As a result, aggregate demand decreases.
B)The Bank of Canada raises interest rates so people plan to buy fewer consumer durables.As a result, aggregate demand decreases.
C)The government increases its expenditures.The demand for loanable funds increases, which raises the real interest rate.Investment increases.
D)The government reduces the goods and services tax.As a result, consumption expenditure increases and aggregate demand increases.
E)The exchange rate value of the Canadian dollar rises.As a result, people living near the U.S.- Canada border increase their imports of goods and net exports decrease.

Question

Quizplus · Accepted Answer

When the Bank of Canada raises interest rates, it becomes more expensive for people to borrow money to make purchases such as buying a car or a house. Therefore, people plan to buy fewer consumer durables which in turn decreases aggregate demand. This shows how monetary policy, through interest rate adjustments, can impact aggregate demand.

Which of the Following Situations Illustrates How Monetary Policy Can