Suppose the Bank of Canada is targeting the interest rate when the demand for money increases.What is the proper monetary response in terms of the money supply?
A) decrease the money supply
B) keep the money supply constant
C) increase the money supply
D) stimulate inflation to increase the demand for money

Question

Suppose the Bank of Canada is targeting the interest rate when the demand for money increases.What is the proper monetary response in terms of the money supply?  
A) decrease the money supply 
B) keep the money supply constant 
C) increase the money supply 
D) stimulate inflation to increase the demand for money

Quizplus · Accepted Answer

When the demand for money increases, the Bank of Canada needs to increase the money supply in order to keep the interest rate at the target level. By supplying more money, the interest rate will decrease, which will encourage investment and borrowing, thus stimulating the economy. Therefore, the proper monetary response in this scenario is to increase the money supply.

Suppose the Bank of Canada Is Targeting the Interest Rate