Figure 10.4 -Refer to Figure 10.4...Suppose the economy's equilibrium starts out with an output gap of $\hat{Y}$ ₁,and real GDP increases so the output gap increases to $\hat{Y}$ ₂.If the Bank of Canada acts to keep the short-term nominal interest rate at the target and the term structure effect,the default-risk premium,and the expected inflation rate remain constant,then the long-term nominal interest rate will A) increase. B) decrease. C) remain constant. D) be indeterminate, since the Bank of Canada has no control over long-term rates.

Question

Quizplus · Accepted Answer

If the Bank of Canada maintains the short-term nominal interest rate at the target and other factors like the term structure effect, default-risk premium, and expected inflation rate remain constant, the long-term nominal interest rate will remain constant.

Figure 104 -Refer to Figure 10 Y^\hat{Y}Y^ ₁,And Real GDP Increases So the Output Gap Increases To Equilibrium

Figure 104

-Refer to Figure 10 $\hat{Y}$ ₁,And Real GDP Increases So the Output Gap Increases To Equilibrium