An Example of How Inflation Targeting by the Bank of Canada

question 62

Multiple Choice

An example of how inflation targeting by the Bank of Canada helps to stabilize the economy is:

• A)firms and households are aware of the announced inflation target and adjust their behaviour so as to maintain this level of actual inflation.
• B)when an output gap opens in the economy, the inflationary target adjusts to close the gap.
• C)when an output gap opens in the economy, the Bank of Canada chooses the inflation target appropriate for closing the gap.
• D)when a recessionary gap reduces the rate of inflation (below the target level)the Bank of Canada will implement an expansionary monetary policy, which helps to close the gap.
• E)when the actual inflation rate falls below the targeted level of inflation, then commercial banks automatically increase deposit creation.

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Definitions:

Bank Reconciliation

The process of matching and comparing figures from accounting records against those presented on a bank statement to ensure accuracy.

Balance Sheet

A financial statement that shows a company's assets, liabilities, and shareholders' equity at a specific point in time.

Cash Receipts Journal

A ledger where all cash inflows or receipts are recorded, usually including sales, loan proceeds, and interest income.

Cash Payments Journal

An accounting ledger that records all cash outflows or payments made by a business.