Table 11.1
-Refer to Table 11.1.The hypothetical information in the table shows what the values for real GDP and the price level will be in 2020 if the Bank of Canada does not use monetary policy.Which of the following policies makes sense if the Bank of Canada wants to keep real GDP at its potential level in 2020?
A)The Bank of Canada should sell government of Canada securities.
B)The Bank should lower the target for the overnight interest rate.
C)The Bank of Canada should pursue contractionary policy.
D)The Bank of Canada should lower capital gains taxes.
E)The Bank of Canada should extend fewer loans to commercial banks.

Question

Table 11.1 
-Refer to Table 11.1.The hypothetical information in the table shows what the values for real GDP and the price level will be in 2020 if the Bank of Canada does not use monetary policy.Which of the following policies makes sense if the Bank of Canada wants to keep real GDP at its potential level in 2020?
A)The Bank of Canada should sell government of Canada securities. 
B)The Bank should lower the target for the overnight interest rate. 
C)The Bank of Canada should pursue contractionary policy. 
D)The Bank of Canada should lower capital gains taxes. 
E)The Bank of Canada should extend fewer loans to commercial banks.

Quizplus · Accepted Answer

Lowering the target for the overnight interest rate is expansionary monetary policy, which would stimulate aggregate demand and help maintain GDP at its potential level. Selling government of Canada securities or pursuing contractionary policy would both be contractionary monetary policies, which could lead to a decrease in aggregate demand and potentially decrease real GDP. Lowering capital gains taxes or extending fewer loans to commercial banks would be fiscal or regulatory policies, respectively, and would not directly impact monetary policy.

Table 11.1 -Refer to Table 11.1.The Hypothetical Information in the Table Shows