Which one of the following would be the most appropriate stabilization policy if the economy is operating beyond its long-run potential capacity?
A)an increase in government purchases, holding taxes constant
B)a purchase of bonds by the Bank of Canada
C)an increase in the bank rate
D)a reduction in taxes, holding government purchases constant

Question

Quizplus · Accepted Answer

If the economy is operating beyond its long-run potential capacity, it is likely experiencing inflationary pressures. In this case, the most appropriate stabilization policy would be to reduce aggregate demand, which can be achieved through monetary policy tools such as an increase in the bank rate. This would make borrowing more expensive, reducing consumption and investment spending, and ultimately reducing inflationary pressures. Options A and D would both increase aggregate demand, potentially exacerbating inflationary pressures. Option B, a purchase of bonds by the Bank of Canada, would increase the money supply, potentially leading to inflationary pressures as well.

Which One of the Following Would Be the Most Appropriate