Suppose the Bank of Canada strictly followed a rule of keeping money supply at $900 billion. This level of money is consistent with the economy's initial general equilibrium.
a. Assume that GDP has increased. How will the interest rate change?
b. Assume that banks have introduced checking accounts that pay interest. How will the interest rate change?
c. What are the effects of the Bank's money targeting policy on the economy?
d. If the Bank decides to target the interest rate instead of money, what will be the effects of the shocks in a and b on aggregate demand?
e. Compare the effects of the two money targeting and the interest rate targeting policies on the economy. Will the money targeting policy make the aggregate demand more stable or less stable than it would be if the interest rate were constant?

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The Answer of Suppose the Bank of Canada strictly followed a rule of keeping money supply at $900 billion. This level of money is consistent with the economy's initial general equilibrium.
a. Assume that GDP has increased. How will the interest rate change?
b. Assume that banks have introduced checking accounts that pay interest. How will the interest rate change?
c. What are the effects of the Bank's money targeting policy on the economy?
d. If the Bank decides to target the interest rate instead of money, what will be the effects of the shocks in a and b on aggregate demand?
e. Compare the effects of the two money targeting and the interest rate targeting policies on the economy. Will the money targeting policy make the aggregate demand more stable or less stable than it would be if the interest rate were constant?

Suppose the Bank of Canada Strictly Followed a Rule of Keeping