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S. In March 2192 the Bank of Canada (BoC) increased its policy interest rate in an effort to increase interest rates throughout the economy. (a)

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S. In March 2192 the Bank of Canada (BoC) increased its policy interest rate in an effort to increase interest rates throughout the economy. (a) Using a diagram for the money market, explain the effect of the decision on interest rates there and how the BoC must respond to support this policy decision. [Hint make sure to discuss the adjustment to the new equilibrium in the money market] [5] 0)) Suppose we treated Canada as a closed economy. What effect will the BoC's policy change have on investment, on aggregate expenditure? Include diagrams in your answer. [5] (c) What additional effect will there be on aggregate expenditure given that Canada is an open economy? [5] (d) How will aggregate demand be affected, whether we treat the economy as closed or Open? (Illustrate in a diagram.) Under what circumstances would this policy be appropnate 1f the B00 was pursuing an ination targeting mandate? (Illustrate in your diagram.) [5]

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