Table 11.4
-Refer to Table 11.4.Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2017 and in 2018 if the Bank of Canada does not use monetary policy.If the Bank of Canada wants to keep real GDP at its potential level in 2018, it should
A)buy government securities.
B)sell government securities.
C)decrease the desired reserve ratio.
D)decrease income taxes.
E)extend additional loans to commercial banks.

Question

Table 11.4 
-Refer to Table 11.4.Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2017 and in 2018 if the Bank of Canada does not use monetary policy.If the Bank of Canada wants to keep real GDP at its potential level in 2018, it should
A)buy government securities. 
B)sell government securities. 
C)decrease the desired reserve ratio. 
D)decrease income taxes. 
E)extend additional loans to commercial banks.

Quizplus · Accepted Answer

According to the table, in 2017 real GDP and potential real GDP are equal, indicating that the economy is operating at full capacity. However, in 2018 real GDP exceeds potential real GDP, which means the economy is overheating. To cool down the economy and bring real GDP back to its potential level, the Bank of Canada could use contractionary monetary policy, such as selling government securities. This would decrease the money supply and increase interest rates, ultimately reducing consumption and investment spending, and slowing down economic growth.

Table 11.4 -Refer to Table 11.4.Consider the Hypothetical Information in the Table