In general,if the Bank of Canada increases its target for the overnight rate,
A) short-term nominal interest rates will increase and long-term nominal interest rates will not change.
B) short-term nominal interest rates will not change and long-term nominal interest rates increase.
C) short-term nominal interest rates will increase and long-term nominal interest rates will also increase.
D) short-term nominal interest rates will not change and long-term nominal interest rates will also not change.

Question

Quizplus · Accepted Answer

When the Bank of Canada increases its target for the overnight rate, it affects short-term nominal interest rates immediately. This is because the overnight rate is used by banks to determine their lending rates on short-term loans. When the overnight rate goes up, banks pass on the increased cost of borrowing to customers in the form of higher interest rates on their loans. This leads to an increase in short-term nominal interest rates.

However, an increase in the overnight rate also sends a signal to the market that the Bank of Canada is tightening its monetary policy to control inflation. This can cause investors to demand higher long-term nominal interest rates to compensate for the perceived increase in inflation risk. As a result, long-term nominal interest rates are likely to also increase, although this effect may take some time to fully materialize. Therefore, the best choice is C - short-term and long-term nominal interest rates will increase.

In General,if the Bank of Canada Increases Its Target for the Overnight