A Former Governor of the Bank of Canada Argued That

question 30

Multiple Choice

A former governor of the Bank of Canada argued that interest rates must be increased in order to reduce inflation, and this would ultimately result in lower interest rates. This apparent contradiction can be explained by noting that

• A)increasing interest rates increases inflation in the short run, but decreases inflation in the long run.
• B)higher interest rates in the short run put downward pressure on inflation which, in turn, lowers demand for borrowed funds, thus decreasing interest rates in the long run.
• C)higher interest rates promote saving which increases the supply of funds for lending and, other things constant, drives the "price" of borrowing down.
• D)the Governor of the Bank of Canada is typically a patronage appointment with little formal training or knowledge of economic theory.
• E)interest rates move in cycles and therefore tend to rise before they fall.

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