Use the policy rule-of-thumb to predict how the Bank would want to change the policy interest rate and the real interest rate targets for each of the following scenarios if its estimate of the neutral real interest rate is 1%.

a. A recession hits the economy leading output to be 0.75%

below potential output and inflation to fall to 1%.

b. An increase in consumer and business confidence pushes the economy to producing output at 2% above potential output while inflation rises to 3.5%.

Learning Objective 22.3 Understand how the Bank of Canada implements monetary policy decisions.