If the Bank of Canada Announces That Its Target for the Overnight

question 242

Multiple Choice

If the Bank of Canada announces that its target for the overnight interest rate is rising from 4 percent to 4.25 percent, how do you expect workers and firms to react?

• A)As long as the Bank of Canada's announcement is credible, workers and firms will increase their consumption and investment spending, which will increase aggregate demand and inflation.
• B)As long as the Bank of Canada's announcement is credible, workers and firms will reduce their consumption and investment spending, which will reduce aggregate demand and reduce inflation.
• C)If the Bank of Canada's announcement is not credible, workers and firms will not expect inflation to fall so they will reduce their consumption and investment spending, which will increase aggregate demand and reduce inflation.
• D)Workers and firms will incorporate the increase in interest rates into their expectations of inflation, and they will expect inflation to rise as a result of the Bank of Canada's policy announcement.
• E)Workers and firms will expect inflation to rise and increase nominal wages to offset the change.