The diagrams below illustrate two alternative approaches to implementing monetary policy.The economy begins in monetary equilibrium with the interest rate equal to 2% and the money supply equal to . FIGURE 28-1
-Refer to Figure 28-1.If the Bank of Canada raises the target interest rate to 3%,as shown in part (i),then it must accommodate the resulting ________ in quantity of money demanded by ________ in financial markets.

Question

The diagrams below illustrate two alternative approaches to implementing monetary policy.The economy begins in monetary equilibrium with the interest rate equal to 2% and the money supply equal to  .  FIGURE 28-1
-Refer to Figure 28-1.If the Bank of Canada raises the target interest rate to 3%,as shown in part (i),then it must accommodate the resulting ________ in quantity of money demanded by ________ in financial markets.

Quizplus · Accepted Answer

When the Bank of Canada raises the target interest rate, the quantity of money demanded decreases. To maintain the higher interest rate, the Bank of Canada would sell government securities, which reduces the money supply.

The Diagrams Below Illustrate Two Alternative Approaches to Implementing Monetary