Reference no: EM132558980

Due to Covid - 19 Pandemic that caused economics crisis, Bank of Canada had cut interest rates; and it is likely to announce further cuts even if interest rates went into negative territory;

If we assume that, because of the actions of Bank of Canada, the economy is fully recovered to the extent that it developed an inflationary gap.

a. After this recovery that developed an inflationary gap, is Bank of Canada going to increase or decrease the interest rates?

b. Based on your answer to (a) above, and with the aid of an appropriate labeled diagram, show the effect on the money supply.

c. With your understanding of the monetary transmission mechanism and assuming an open economy, explain how the Central Bank of Canada's actions affect the various components of Aggregate Demand, and, ultimately the equilibrium price level and real GDP? Use the appropriate labeled diagrams to help explain your answers.