In the early 1980s the bank of Canada increased interest rates to 20%. The bank of Canada argued that it had to do this fight inflation, but it also had the following effects:

A. Unemployment decreased, workers' wages increased and profits decreased
B. Unemployment decreased, workers' wages decreased and profits increased
C. Unemployment increased, workers' wages increased and profits decreased
D. Unemployment increased, workers' wages decreased and profits increased
E. Unemployment decreased, workers' wages increased and profits increased

Question

In the early 1980s the bank of Canada increased interest rates to 20%. The bank of Canada argued that it had to do this fight inflation, but it also had the following effects:

A. Unemployment decreased, workers' wages increased and profits decreased
B. Unemployment decreased, workers' wages decreased and profits increased
C. Unemployment increased, workers' wages increased and profits decreased
D. Unemployment increased, workers' wages decreased and profits increased
E. Unemployment decreased, workers' wages increased and profits increased

mertsj · Answer

D

anonymous · Answer

the money supply will contract, so in terms of your IS-LM model the LM curve will shift upwards and hence economic activity will shrink i.e. unemplyoment will increase. In such a scenario wages will decrease and profits increase.