Which of the following provides the best example of how inflation targeting by the Bank of Canada helps to stabilize the economy?

Question

Quizplus · Accepted Answer

Inflation targeting helps stabilize the economy by allowing the central bank to adjust monetary policy in response to changes in the economy. When there is a recessionary gap, the Bank of Canada can use expansionary monetary policy (such as lowering interest rates) to close the gap and increase inflation back to the target level. This helps to stabilize the economy by addressing the gap and maintaining the target level of inflation. Option A is partially true, but does not address the role of the Bank of Canada in stabilizing the economy. Option C is inaccurate, as commercial banks do not automatically increase deposit creation in response to low inflation. Option D is incorrect, as the inflation target is not adjusted to close output gaps. Option E is also incorrect, as the appropriate inflation target is chosen based on economic conditions, not specifically to close output gaps.

Which of the Following Provides the Best Example of How