In response to an inflationary gap, the Bank of Canada

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In response to an inflationary gap, the Bank of Canada would aim to reduce aggregate demand in order to bring it back to the equilibrium level of output. To do this, the Bank of Canada would raise the overnight loans rate by selling securities. This would increase the cost of borrowing for commercial banks, which would in turn reduce the amount of lending and borrowing occurring in the economy. This reduction in lending and borrowing would decrease aggregate demand and ultimately reduce inflationary pressures.

In Response to an Inflationary Gap, the Bank of Canada