Beginning from a position of long-run equilibrium, an expansionary monetary policy by the Bank of Canada...
Beginning from a position of long-run equilibrium, an expansionary monetary policy by the Bank of Canada causes
A) an increase in the level of potential output
B) a fall in the general price level
C) an increase in most market interest rates
D) aggregate demand for goods and services to exceed potential output
E) aggregate demand for goods and services to fall short of potential output
Homework Answers
Option d is correct
If we start from the long run, monetary expansion increases the money supply which reduces the rate of interest and stimulates investment. this increases aggregate demand and aggregate demand curve shifts to the right surpassing the potential GDP. In the short run there will be an increase in the price level and an increase in the GDP because potential GDP remains unchanged
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