If the Bank of Canada does not take into account the additional policy channels available in an open economy, then ________ when conducting contractionary monetary policy.
A)it is likely to decrease GDP too much and cause a recession
B)it is likely to decrease GDP too little and inflation will persist
C)it is likely to increase GDP too much and inflation will persist
D)it is likely to increase GDP too little and cause a recession
E)it is likely to decrease GDP too little and cause deflation

Question

Quizplus · Accepted Answer

When the Bank of Canada conducts contractionary monetary policy without considering the additional policy channels available in an open economy, it may underestimate the impact of its actions. This can lead to a larger than intended decrease in GDP, potentially causing a recession.

If the Bank of Canada Does Not Take into Account