The diagrams below illustrate two alternative approaches to implementing monetary policy.The economy begins in monetary equilibrium with the interest rate equal to 2% and the money supply equal to . FIGURE 28-1 Refer to Figure 28-1.If the Bank of Canada raises the target interest rate from 2% to 3%,it is pursuing a(n)________ monetary policy and the quantity of money demanded will ________.

Question

The diagrams below illustrate two alternative approaches to implementing monetary policy.The economy begins in monetary equilibrium with the interest rate equal to 2% and the money supply equal to  .  FIGURE 28-1 Refer to Figure 28-1.If the Bank of Canada raises the target interest rate from 2% to 3%,it is pursuing a(n)________ monetary policy and the quantity of money demanded will ________.

Quizplus · Accepted Answer

By raising the target interest rate, the Bank of Canada is pursuing a contractionary monetary policy. According to the diagram, at the initial interest rate of 2%, the quantity of money demanded is 11eac5cb_5acb_ccf0_888f_530d83fb4504_TB7713_00_TB7713_00. When the interest rate increases to 3%, the quantity of money demanded will decrease, shifting the demand curve to the left. Therefore, the quantity of money demanded will fall.

The Diagrams Below Illustrate Two Alternative Approaches to Implementing Monetary