Answer to Question #83442 in Microeconomics for parii

Question

1. The Bank of Canada has recently (late October) increased interest rate. In explaining its
decision to raise the rate, the bank noted the recently announced free trade deal with the
United States and Mexico as a reason for optimism about Canada's economy (Bank of
Canada raises interest rate to 1.75%, CBC News, Oct 24, 2018). Explain why the Bank
wants to increase the interest rates in response to such optimism. Also explain how the
interest rate increase would influence aggregate demand to achieve price stability (make
sure you explain which part(s) of the aggregate demand are affected (consumption,
investment, government purchases, and/or net export) and in which direction (increase or
decrease) they change and why.
2. Using the aggregate demand - aggregate supply model, explain the short-run and longrun
effects of an increase in the money supply. Explain every shift in AD or AS and why
it happens (the mechanism behind it).

Answer 1

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