True or False?
The statement is basically false. The Bank of Canada does control the overnight lending rate at which the commercial banks lend and borrow reserves from each other and from itself. But there is little reason to expect that this will cause real interest rates to decline througout the Canadian economy. The reason is that interest rates on all major assets are determined by world investors, not just Canadian ones. Canadian interest rates can only differ from their counterparts abroad by the difference in the risk of holding Canadian as opposed to rest-of-world assets, or from expected capital gains or losses from expected future movements in Canada's real exchange rates with respect to other industrial countries. Monetary policy does not operate by reducing real interest rates in the economy. Rather, it operates through its effect on nominal and real exchange rates. Expansion occurs through an increase in net exports, not as a result of an increase in domestic investment.