Think of a time when the economy was very strong for several years and business was booming. During that time, however, prices began to increase and there was fear that the increase might continue for an extended period. Which of the following actions could the Bank of Canada have taken to counteract the increasing prices?

Question

Quizplus · Accepted Answer

To counteract increasing prices, the Bank of Canada could raise the overnight rate. By doing so, it would become more expensive for banks to borrow money from the central bank, which in turn would lead to higher lending rates for consumers and businesses. This would reduce the amount of money flowing through the economy and ultimately decrease demand for goods and services, putting downward pressure on prices. The other options (lowering the reserve requirement, buying government bonds, or increasing the overall supply of money) would all have the opposite effect of increasing the amount of money in circulation, which would fuel inflation rather than fight it.

Think of a Time When the Economy Was Very Strong