The Diagrams Below Illustrate Two Alternative Approaches to Implementing Monetary

question 33

Multiple Choice

The diagrams below illustrate two alternative approaches to implementing monetary policy.The economy begins in monetary equilibrium with the interest rate equal to 2% and the money supply equal to . FIGURE 28-1 Refer to Figure 28-1.If the Bank of Canada's goal is to increase the target interest rate from 2% to 3%,then the most effective approach is to

• A)reduce the money supply to ,as shown in part (ii),and then let the interest rate adjust to 3%.
• B)increase the money supply to ,as shown in part (ii),and then let the interest rate adjust to 3%.
• C)allow the money supply to shift to by market forces,which will cause the interest rate to rise to 3%.
• D)raise the interest rate to 3%,as shown in part (i),and then buy government securities in financial markets to accommodate the decline in the quantity of money demanded.
• E)raise the interest rate to 3%,as shown in part (i),and then sell government securities in financial markets to accommodate the decline in the quantity of money demanded.

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Definitions:

Confidence Level

The probability that a confidence interval captures the true parameter value in repeated samples or experiments.

Population Parameter

A value that represents a characteristic of an entire population, such as its mean or standard deviation, often estimated from a sample.

Confidence Interval

A selection of numerical values, culled from sample data, likely to hold within it the value of an unrevealed population parameter.

Population Mean

The average of all the data points in a population, representing the central tendency of the entire population's values.