In response to a recessionary gap, the Bank of Canada will ________ the overnight rate to ________.

Question

Quizplus · Accepted Answer

When there is a recessionary gap, the economy is producing below its potential output, resulting in high unemployment. To stimulate spending and create more economic activity, the Bank of Canada can lower the overnight rate. This will lower the cost of borrowing for banks, which will allow them to lend at lower rates to consumers and businesses. This, in turn, will increase borrowing and spending, and shift the aggregate demand curve rightward, closing the recessionary gap. Therefore, the correct choice is B.

In Response to a Recessionary Gap, the Bank of Canada