If the Bank of Canada raises the overnight interest rate, this will ________ inflation and ________ real GDP in the short run.

Question

Quizplus · Accepted Answer

When the Bank of Canada raises the overnight interest rate, it becomes more expensive for firms and individuals to borrow money, resulting in reduced spending and investment. As a result, aggregate demand declines, causing a decrease in real GDP in the short run. Additionally, the higher interest rates increase the cost of borrowing, making it more difficult for firms to borrow money to finance their operations, thereby reducing investment and economic growth. However, the reduction in aggregate demand may cause a decrease in the demand for goods and services, which reduces the price level and decreases inflation.

If the Bank of Canada Raises the Overnight Interest Rate