Following the recession of 2008-2009,the Bank of Canada embraced a policy of forward guidance.I.This policy was adopted because the short-term interest rate had fallen to almost zero.II.This policy can be of limited usefulness since households and firms understand that the time-inconsistency problem applies.

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Both statements are true. The Bank of Canada adopted forward guidance as a policy tool after the recession of 2008-2009 because the short-term interest rate had fallen to almost zero. However, the usefulness of the policy may still be limited because households and firms are aware of the time-inconsistency problem that can arise from such policy announcements. Knowing that the central bank may change its mind in the future can reduce the impact of forward guidance on the expectations of economic agents.

Following the Recession of 2008-2009,the Bank of Canada Embraced a Policy