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Suppose that rather than expectations being strictly adaptive, increases in the money supply cause the long-run expected inflation rate to increase immediately. a. In this case, when the Bank of Canada increases the money supply, long-term real interest rates b. How does the link between money supply increases and expected inflation affect the Bank of Canada's ability to affect the economy through the interest rate channel? Since an increase in the money supply can increase long-run inflationary expectations, this implies that A. the Bank of Canada's ability to affect long-term real interest rates will be reinforced, with changes in the real interest rate being larger than desired in the same direction. O B. the Bank of Canada's ability to affect real interest rates may be limited, especially for longer-term rates. OC. the Bank of Canada has complete control over long-term real interest rates. D. the Bank of Canada has no ability to affect short-term nominal interest rates.

Suppose that rather than expectations being strictly adaptive, increases in the money supply cause the long-run expected inflation rate to increase immediately. a. In this case, when the Bank of Canada increases the money supply, long-term real interest rates b. How does the link between money supply increases and expected inflation affect the Bank of Canada's ability to affect the economy through the interest rate channel? Since an increase in the money supply can increase long-run inflationary expectations, this implies that A. the Bank of Canada's ability to affect long-term real interest rates will be reinforced, with changes in the real interest rate being larger than desired in the same direction. O B. the Bank of Canada's ability to affect real interest rates may be limited, especially for longer-term rates. OC. the Bank of Canada has complete control over long-term real interest rates. D. the Bank of Canada has no ability to affect short-term nominal interest rates.

Brief Principles of Macroeconomics (MindTap Course List)
Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter16: The Influence Of Monetary And Fiscal Policy On Aggregate Demand
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Suppose that rather than expectations being strictly adaptive, increases in the money supply cause the long-run expected inflation rate to increase immediately. a. In this case, when the Bank of Canada increases the money supply, long-term real interest rates b. How does the link between money supply increases and expected inflation affect the Bank of Canada's ability to affect the economy through the interest rate channel? Since an increase in the money supply can increase long-run inflationary expectations, this implies that A. the Bank of Canada's ability to affect long-term real interest rates will be reinforced, with changes in the real interest rate being larger than desired in the same direction. B. the Bank of Canada's ability to affect real interest rates may be limited, especially for longer-term rates. C. the Bank of Canada has complete control over long-term real interest rates. O D. the Bank of Canada has no ability to affect short-term nominal interest rates.
Transcribed Image Text:Suppose that rather than expectations being strictly adaptive, increases in the money supply cause the long-run expected inflation rate to increase immediately. a. In this case, when the Bank of Canada increases the money supply, long-term real interest rates b. How does the link between money supply increases and expected inflation affect the Bank of Canada's ability to affect the economy through the interest rate channel? Since an increase in the money supply can increase long-run inflationary expectations, this implies that A. the Bank of Canada's ability to affect long-term real interest rates will be reinforced, with changes in the real interest rate being larger than desired in the same direction. B. the Bank of Canada's ability to affect real interest rates may be limited, especially for longer-term rates. C. the Bank of Canada has complete control over long-term real interest rates. O D. the Bank of Canada has no ability to affect short-term nominal interest rates.
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