If the economy is experiencing an undesired inflationary gap, the Bank of Canada could

Question

Quizplus · Accepted Answer

In order to decrease the undesired inflationary gap, the Bank of Canada needs to decrease the demand for goods and services, which can be done by decreasing the supply of money, raising interest rates, and shifting the AD curve inward. This would decrease the overall spending in the economy and reduce prices, bringing output closer to potential GDP. Option A, C, and D would have the opposite effect and worsen the inflationary gap. Option E is also incorrect because increasing the supply of money would increase, not decrease, aggregate demand.

If the Economy Is Experiencing an Undesired Inflationary Gap, the Bank