If the Bank of Canada wants to eliminate an inflationary gap, which of the following would be an appropriate policy?

Question

Quizplus · Accepted Answer

To eliminate an inflationary gap, the Bank of Canada would need to reduce aggregate demand. One way to do this is by raising the overnight loans rate, which would increase the cost of borrowing and reduce borrowing and spending by consumers and businesses. Lowering the overnight loans rate would have the opposite effect and potentially worsen the inflationary gap. Buying government securities and decreasing the government budget deficit may also help reduce aggregate demand, but these options are not as effective or immediate as raising the overnight loans rate. Lowering the exchange rate may stimulate exports and increase aggregate demand, which would not be helpful in this situation.

If the Bank of Canada Wants to Eliminate an Inflationary