The ability of the Bank of Canada to use monetary policy to affect economic variables such as real GDP ultimately depends upon its ability to affect
A)tax rates.
B)real interest rates.
C)nominal interest rates.
D)foreign exchange rates.
E)commercial bank reserves.

Question

Quizplus · Accepted Answer

The Bank of Canada can directly control the overnight interest rate, which affects real interest rates in the economy as it influences the cost of borrowing for businesses and consumers. By raising or lowering interest rates, the central bank can influence the level of investment and consumption in the economy, which in turn can impact real GDP. Other variables listed, such as tax rates, foreign exchange rates, and commercial bank reserves, may indirectly affect the economy, but they are not directly controlled by the Bank of Canada through its monetary policy tools. Nominal interest rates are also influenced by the central bank's policies, but they do not reflect changes in inflation, which is crucial for determining the real cost of borrowing.

The Ability of the Bank of Canada to Use Monetary