Canadian Securities Course (CSC) Level 1 Practice Exam

How would the Bank of Canada implement monetary policy during a recession and unemployment?

1. Increase interest rates

2. Decrease the money supply

3. Lower interest rates

4. Implement quantitative easing

The correct answer is: Lower interest rates

During a recession and high unemployment, the Bank of Canada typically implements expansionary monetary policy to stimulate the economy. Lowering interest rates is a common strategy used by central banks during economic downturns. By reducing interest rates, borrowing becomes cheaper, which encourages businesses and consumers to spend more and invest, ultimately helping to boost economic activity and reduce unemployment. Option A, increasing interest rates, would not be an appropriate response during a recession as it would likely slow down economic activity further by making borrowing more expensive. Option B, decreasing the money supply, would also not be a suitable course of action during a recession because it could further restrict economic activity at a time when stimulus is needed. Option D, implementing quantitative easing, involves central banks buying financial assets to increase the money supply and lower interest rates. Although this strategy can be used during economic crises, lowering interest rates directly (Option C) is often the initial step taken by central banks to address a recession and unemployment.