Beginning from a position of long-run equilibrium,a contractionary monetary policy by the Bank of Canada causes

Question

Quizplus · Accepted Answer

Contractionary monetary policy by the Bank of Canada leads to a reduction in aggregate demand which, in the long-run, leads to potential output exceeding aggregate demand for goods and services. This is because the reduction in aggregate demand leads to reduced production as firms cut back on output and lay off workers, causing the economy to operate below its potential. As a result, potential output exceeds aggregate demand for goods and services.

Beginning from a Position of Long-Run Equilibrium,a Contractionary Monetary Policy