Which of the following situations illustrates how monetary policy can influence aggregate demand?
A)The Bank of Canada raises interest rates so people plan to buy less consumer durables. As a result, aggregate demand decreases.
B)Investors, anticipating an erosion of financial wealth due to inflation, decide to save more. As a result, aggregate demand decreases.
C)The government reduces the goods and services tax. As a result, consumption expenditure increases and aggregate demand increases.
D)The exchange rate value of the Canadian dollar rises. As a result, people living near the U.S.-Canada border increase their imports of goods and net exports decrease.
E)The government increases its expenditures. The demand for loanable funds increases, which raises the real interest rate. Investment increases.

Question

Quizplus · Accepted Answer

When the central bank raises interest rates, borrowing becomes expensive, and people tend to save more rather than spending it. This, in turn, reduces the aggregate demand in the economy, as consumption expenditure decreases.

Which of the Following Situations Illustrates How Monetary Policy Can