Because prices are sticky in the short-run, when the Bank of Canada raises the overnight rate, ________.
A) nominal interest rates fall
B) real interest rates rise
C) inflation falls
D) real interest rates fall

Question

Quizplus · Accepted Answer

When the Bank of Canada raises the overnight rate, it directly increases the cost of borrowing. This leads to higher nominal interest rates. Since prices are sticky in the short run and do not adjust immediately, the real interest rate, which is the nominal interest rate adjusted for inflation, also rises.

Because Prices Are Sticky in the Short-Run, When the Bank