Answer and Explanation:
If the Bank of Canada had set the overnight loans rate according to the Taylor rule, the course of the overnight loans rate would have been different from the actual course it took.
The Taylor rule is an economic principle that suggests how central banks should set their policy interest rates based on inflation and the output gap. It provides a guideline for determining an appropriate interest rate based on these factors.
To answer the specific question, we need to analyze the given options:
A. persistently higher; 4 percent
B. persistently lower; 1 percent
C. higher on some occasions and lower on others; 1 percent
D. higher on some occasions and lower on others; 4 percent
Based on the Taylor rule, the appropriate interest rate would depend on the inflation rate and the output gap.
If the Bank of Canada had followed the Taylor rule during 2008 when the overnight loans rate was 1.5 percent, the Taylor Rule would have kept it close to:
B. persistently lower; 1 percent
This suggests that according to the Taylor rule, the overnight loans rate would have been consistently lower than the actual rate of 1.5 percent during 2008.
In terms of inflation and the output gap, the Taylor rule suggests that a higher inflation rate and a larger output gap would warrant a higher interest rate. Conversely, a lower inflation rate and a smaller output gap would suggest a lower interest rate.
Overall, if the Bank of Canada had followed the Taylor rule, the overnight loans rate would have been persistently lower, around 1 percent, during 2008, compared to the actual rate of 1.5 percent. The impact on inflation and the output gap would depend on the specific economic conditions and how they align with the Taylor rule's guidelines.