As a result of the overnight target rate set at the effective lower bound during the 2008-2009 Canadian recession,the ADI-IA model was
A) no longer self-correcting as interest rates could not be reduced when inflation rates fell.
B) no longer self-correcting as fiscal policy could not eliminate the recessionary gap.
C) no longer self-correcting as inflation rates could not change.
D) extremely effective as lower inflation rates reduced interest rates even further.
E) extremely effective as lower inflation rates reduced real interest rates to negative values.

Question

Quizplus · Accepted Answer

The ADI-IA model was no longer self-correcting because interest rates could not be reduced further when inflation rates fell, as they were already at the effective lower bound.

As a Result of the Overnight Target Rate Set at the Effective