If the Bank of Canada sells government securities from the chartered banks when the SRAS is relatively steep,what should we expect to happen to interest rates and real GDP?
A)Interest rates will rise and real GDP will fall a little.
B)Interest rates will fall and real GDP will rise a little.
C)Interest rates will fall and real GDP will rise substantially.
D)Interest rates will rise and real GDP will fall substantially.

Question

Quizplus · Accepted Answer

When the Bank of Canada sells government securities from the chartered banks, it reduces the amount of money in circulation and increases interest rates in the short run. This policy move is aimed at decreasing aggregate demand and reducing inflationary pressures, which typically occur when the SRAS (short-run aggregate supply) is steep. However, because interest rates will rise, borrowing and spending by households and firms will decrease slightly, leading to a contraction in real GDP. Therefore, choice A is the best option.

If the Bank of Canada Sells Government Securities from the Chartered