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What is the action that the Central Bank takes to limit the impact of increased foreign Interest rates on Interest rates in Canada?
Suggested Answer: C
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When foreign interest rates rise, capital may flow out of Canada as investors seek higher returns abroad. To counter this, the Bank of Canada may increase short-term interest rates to make Canadian assets more attractive and maintain the value of the Canadian dollar. This helps stabilize the exchange rate and reduces the risk of imported inflation.
Such actions demonstrate the central bank's role in managing monetary policy to preserve economic stability and maintain currency confidence.
Study Document Reference:
Volume 1, Chapter 5: Monetary Policy and the Role of the Bank of Canada.
12 comments · newest first
DO
Dorathy
3 days ago
A could work too, but inflation risk is high.
EL
Elza
8 days ago
I agree, C makes sense. Strong currency is crucial.
LA
Lashawnda
13 days ago
I think C is the best choice. It helps keep the currency stable.
AI
Aimee
18 days ago
Not sure if reducing rates is the best idea... feels off.
MA
Maryann
23 days ago
Totally agree with C, we need to protect our currency.
NI
Nickie
28 days ago
Wait, are we really considering D? That sounds risky!
DW
Dwight
1 month ago
I think A makes more sense with inflation risks.
LE
Leatha
1 month ago
C is the right move to keep our dollar strong!
WI
Wilbert
1 month ago
Adding a default premium sounds familiar, but I don't think that's the main action the Central Bank would take in response to foreign interest rates.
PE
Pearly
2 months ago
I feel like the answer has to do with maintaining currency stability, so maybe it's option C? But I can't recall all the details from my notes.
JU
Justine
2 months ago
I remember a practice question about how foreign interest rates affect domestic rates, and I think reducing interest rates could lead to more borrowing, but that doesn't seem right here.
DA
Danilo
2 months ago
I think the Central Bank might increase short-term interest rates to maintain the currency value, but I'm not entirely sure if that's the only action they would take.