To close an expansionary gap,the Bank of Canada ________ interest rates,which ______ planned aggregate expenditure and ________ short-run equilibrium output.

Question

Quizplus · Accepted Answer

To close an expansionary gap, the Bank of Canada raises interest rates which leads to a decrease in planned aggregate expenditure and a decrease in short-run equilibrium output. Option A is incorrect because increasing interest rates would not increase planned aggregate expenditure. Option B is incorrect because if interest rates are raised, it would lower planned aggregate expenditure and decrease short-run equilibrium output. Option D is incorrect because lowering interest rates would increase planned aggregate expenditure and increase short-run equilibrium output, which goes against the goal of closing an expansionary gap. Option E is incorrect because lowering interest rates would increase planned aggregate expenditure and increase short-run equilibrium output, which again would not help to close the expansionary gap.

To Close an Expansionary Gap,the Bank of Canada ________ Interest