A significant increase in the official interest rate by the Bank of Canada would be expected to
A) decrease consumption spending on domestic goods.
B) decrease investment spending on domestic goods.
C) decrease net foreign spending on domestic goods.
D) shift down the expenditure line.
E) decrease consumption,investment,and net foreign spending,and shift down the expenditure linE.

Question

Quizplus · Accepted Answer

A significant increase in the official interest rate by the Bank of Canada would raise the cost of borrowing, which would reduce consumption and investment spending as borrowers would have to pay more in interest expenses. This, in turn, would reduce domestic demand for goods and services. Additionally, the higher interest rate would increase the returns on domestic financial investments, potentially attracting foreign capital inflows and causing the exchange rate to appreciate. This would decrease net foreign spending on domestic goods. As a result, all components of aggregate expenditure (consumption, investment, and net exports) would decrease, leading to a downward shift of the expenditure line.

A Significant Increase in the Official Interest Rate by the Bank