If the Bank of Canada adopts stronger anti-inflation policy (for example,by lowering its inflation target),
A) in the short run,the IA curve will shift downward and a recessionary gap is created.
B) in the long run,the ADI curve will shift to the left and the long-run equilibrium is restored.
C) in the short run,the ADI curve will shift to the right and an expansionary gap will be created.
D) in the short run,the ADI curve shifts to the left and a recessionary gap is created.
E) in the short run,the ADI curve shifts to the right and a recessionary gap is created.

Question

Quizplus · Accepted Answer

If the Bank of Canada adopts stronger anti-inflation policy, such as lowering its inflation target, it will lead to a contractionary monetary policy. This means that the money supply will decrease, leading to an increase in interest rates, a decrease in investment and consumption spending, and a decrease in aggregate demand. This will cause the ADI curve to shift to the left, creating a recessionary gap in the short run. In the long run, as prices and wages adjust, the economy will return to the long-run equilibrium level of output, which is determined by the economy's potential output. Therefore, the best choice is D.

If the Bank of Canada Adopts Stronger Anti-Inflation Policy (For