The Bank of Canada's policy of inflation targeting represents I: an additional automatic stabilizer when the economy is hit with demand shocks;
II: an additional automatic stabilizer when the economy is hit with supply shocks.
A) I is true; II is not.
B) II is true; I is not.
C) Both I and II are true.
D) Neither I nor II is true.

Question

Quizplus · Accepted Answer

The Bank of Canada's policy of inflation targeting is designed to stabilize demand-side inflation by adjusting the short-term interest rates. As a result, it can act as an automatic stabilizer when the economy is hit with demand shocks (such as a recession). However, inflation targeting does not directly address supply-side shocks, such as an increase in the price of oil or other commodities. Therefore, statement II is not true.

The Bank of Canada's Policy of Inflation Targeting Represents I