Your roommate is having trouble grasping how monetary policy works.Which of the following explanations could you use to correctly describe the mechanism by which the Bank of Canada can affect the economy through monetary policy? Increasing the money supply
A)lowers the interest rate, and firms increase investment spending.
B)causes people to spend more because they know prices will rise in the future.
C)raises the interest rate and consumers decrease spending on durable goods.
D)lowers the interest rate, raises the value of the dollar, lowers the prices of exports, and raises net exports.
E)Increasing the money supply reduces the cost of the government to borrow allowing the government to engage in more expansionary fiscal policy.

Question

Quizplus · Accepted Answer

When the Bank of Canada increases the money supply, it puts downward pressure on interest rates. Lower interest rates encourage firms to invest more in capital projects that they might not have undertaken otherwise. This, in turn, leads to increased economic activity and growth.

Your Roommate Is Having Trouble Grasping How Monetary Policy Works