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 pursues a(n)________ monetary policy and raises the target interest rate from 2% to 3%,then the quantity of money demanded will ________.

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 pursues a(n)________ monetary policy and raises the target interest rate from 2% to 3%,then the quantity of money demanded will ________.

Quizplus · Accepted Answer

If the Bank of Canada raises the target interest rate from 2% to 3%, this is a contractionary monetary policy which will lead individuals to demand less money since the cost of borrowing has increased. Therefore, the quantity of money demanded will fall.

The Diagrams Below Illustrate Two Alternative Approaches to Implementing Monetary