The Bank of Canada recently announced an increase in its target for the overnight rate. Which of the following is the most likely intended macroeconomic effect of this policy decision?

Question: The Bank of Canada recently announced an increase in its target for the overnight rate. Which of the following is the most likely intended macroeconomic effect of this policy decision?

Answer options:

• To stimulate aggregate demand and encourage consumer spending. ✅ To reduce inflationary pressures by increasing borrowing costs and slowing economic growth.
• To weaken the Canadian dollar to boost exports and improve the trade balance.
• To directly increase government tax revenues to fund public infrastructure projects.

Correct answer: To reduce inflationary pressures by increasing borrowing costs and slowing economic growth.

Explanation: Increasing the overnight rate makes borrowing more expensive, which tends to reduce spending and investment, thereby cooling economic activity and combating inflation.