True or False?
The correct answer is False. It is nominal rather than real interest rates that are observed. Since the nominal interest rate equals the real rate plus the expected rate of inflation, the decline of Canadian interest rates no doubt reflects at least in part a decline in the expected inflation rate (consequent on a decline in the actual inflation rate). Indeed, it could be that the Bank of Canada was contracting rather than expanding the money supply relative to the demand for it during the period. The Bank of Canada can have little, if any, effect on domestic real interest rates.