Question

What actions taken by the Bank of Canada in 2015 and 2016 would you expect to have influenced real GDP growth in 2018? Explain how those policy actions would transmit to real GDP. In 2015 and 2016, the Bank of Canada kept the overnight rate low. This policy would transmit to real GDP by all of the following except ______

A. an increase in net exports

B. an increase in investment

C. an increase in consumption expenditure

D. an increase in short-run aggregate supply

Draw a graph of aggregate demand and aggregate supply to illustrate your answer to the previous question. The graph shows the aggregate demand curve and the short-run aggregate supply in Canada in 2016. Suppose the Bank of Canada keeps the overnight rate low, which lowers the real interest rate and stimlates the economy. Draw a curve to show the Bank's desired effect. Label it. Draw a point at the new equilibrium price level and new equilibrium real GDP.

Answer 1

The Policy actions taken by the Bank of Canada in 2015 and 2016 that would influence the real GDP growth in 2018 would be all the three except (D) an increase in short-run aggregate supply.

                        Explanation: This is because, all the other options such as increasing net exports, increasing investments, increasing the consumption expenditure stimulate growth and development in the economy which further leads to an increase in the GDP of the country. the option (D) an increase in short-run aggregate supply, does not affect the overall increase of growth and development in the longer run, and GDP stays unaffected by it.

                                         From the above diagram we can see that demand is measured along the X axis and supply is measure along the Y axis. In the shorter-run, the interest rate is lower, which stimulates the demand in the economy, thereby increasing growth and development which effects positively the GDP of the economy. Here we can see that AD is the demand curve and AS is the supply curve. As a result of the reduction of interest rate, the demand curve shifts to AD to AD1 therefore, shifting the demand from OB to OD. The Equilibrium shifts from point E to point E1 in the long run.