Posted by Anonymous on .
Suppose government spending increases in a closed economy. Would the effect on aggregate demand be larger if the Bank of Canada took no action in response, or if the Bank were committed to maintaining a fixed interest rate? Explain
I presume you are from Canada.
Larger under b) the bank is committed to maintaining a fixed interest rate.
Use a IS/LM curve analysis. An increase in G shift outward the IS curve, Which, by its self, increase aggregate demand and interest rates. To maintain a constant r, the Bank increases the money supply which shifts outward the LM curve.