Question

In September​ 2015, the unemployment rate was 7.0​ percent, the inflation rate was 0.1​ percent, and the overnight loans rate target was 0.5 percent. In September​ 2017, the unemployment rate was 6.2​ percent, the inflation rate was 1.4​ percent, and the overnight loans rate target was 1.0 percent.

How might the Bank of​ Canada's decisions that raised the overnight loans rate from 0.5 percent to 1.0 percent have been influenced by the unemployment rate and the inflation​ rate?

The Bank of​ Canada's decisions that raised the overnight rate from 0.5 percent to 1 percent might have been influenced by​ ______.

A. the unemployment rate being below the natural unemployment rate

B. the rising inflation rate and falling unemployment rate

C. the falling unemployment rate only

D. the inflation rate being above the target range

Answer 1

The correct answer is Option (B) The rising inflation rate and falling unemployment rate

Explanation -

It is important to note that inflation was only 0.1% in September 2015. However, the bank of Canada still increased overnight rate from 0.5% to 1%. The potential reason is that the Bank of Canada expected inflation to accelerate amidst economic recovery. This is clear when we see that inflation rate was 1.4​ percent in September 2017. At the same time, unemployment rate declined during this period from 7.0% to 6.2%. Therefore, the economy was on a growth trajectory and that translated into contractionary monetary policy by the bank of Canada.