Given its existing policy regime of "inflation targeting," the Bank of Canada would likely react to a large positive aggregate demand shock by

Question

Quizplus · Accepted Answer

Inflation targeting means that the Bank of Canada sets a target for the inflation rate and adjusts interest rates to achieve that target. If there is a large positive aggregate demand shock, it means that there is excessive demand in the economy, leading to potential inflationary pressures. To prevent inflation from rising above the target level, the Bank of Canada would likely increase its target for the overnight interest rate, making borrowing more expensive and slowing down the economy. Option C reflects this approach.

Given Its Existing Policy Regime of "Inflation Targeting," the Bank