The Bank of Canada's response to changes in inflation is more complex than identified in the ADI-IA model because
A) the monetary policy rule can change over time.
B) we cannot calculate the monetary policy rule.
C) the self-correcting mechanism is only effective for recessionary gaps.
D) the self-correcting mechanism is only effective for expansionary gaps.
E) the Bank of Canada responds to expected future inflation as well as current inflation.

Question

Quizplus · Accepted Answer

The Bank of Canada's response to changes in inflation is more complex than identified in the ADI-IA model, as the bank responds not only to current inflation but also to expected future inflation. This is not explicitly accounted for in the ADI-IA model. Additionally, the monetary policy rule can change over time, which also complicates the Bank of Canada's response to inflation. However, the self-correcting mechanism is not restricted to only recessionary or expansionary gaps, and the calculation of the monetary policy rule is not a relevant factor in this complexity.

The Bank of Canada's Response to Changes in Inflation Is