From an initial long-run macroeconomic equilibrium, if the Bank of Canada anticipated that next year aggregate demand would grow significantly faster than long-run aggregate supply, then the Bank of Canada would most likely
A)increase income tax rates.
B)decrease income tax rates.
C)increase interest rates.
D)decrease interest rates.
E)decrease the operating band for the bank rate.

Question

Quizplus · Accepted Answer

If the Bank of Canada anticipates a significant increase in aggregate demand relative to long-run aggregate supply, it would lead to inflationary pressures in the economy. To counter these pressures, the Bank of Canada would most likely increase interest rates to reduce aggregate demand and bring it back towards long-run aggregate supply. This would make borrowing more expensive, thus reducing consumption and investment spending in the economy. The Bank of Canada might also choose to decrease the operating band for the bank rate, but that alone would not be enough to counter the inflationary pressures. Therefore, option C is the best choice.

From an Initial Long-Run Macroeconomic Equilibrium, If the Bank of Canada