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he ultimate objective of the Bank of Canada is to target an inflation rate between 1...

he ultimate objective of the Bank of Canada is to target an inflation rate between 1 and 3 percent, aiming for the middle of the band that is 2 percent. Suppose that inflation is expected to go above 2 percent, the central bank will react by changing the target for the overnight rate.

Will the Bank increase or decrease the target for overnight interest rate?

Changes in the interest rate affect various kinds of economic activity and

thereby, over time, inflation. Explain how monetary policy works and what are transmission channels through which the monetary policy affects economic activity and the inflation?

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Answer #1

The overnight rate will be increased by the Bank of Canada. It will help in curbing the ugly consumption habits and inflation will be controlled in the economy by the Bank of Canada.
When an inflation increases, the bank uses contractionary monetary policy. As a part of this monetary policy, interest rates are increased. Due to increase in interest rate, the households and firms are discouraged in their borrowings from banks and financial institutions. It leads reduction in consumption as well as investment spending. As a result, aggregate demand is curbed and price level decreases. Hence, inflation rate comes down within the range.

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