Assume the economy is initially in equilibrium where potential GDP is less than real GDP.If the expected inflation rate,the term structure effect,and the default-risk premium are constant,________ in the Bank of Canada's short-term nominal interest rate will shift the MP curve up,which will result in real GDP ________.
A) an increase; falling
B) an increase; rising
C) a decrease; falling
D) a decrease; rising

Question

Quizplus · Accepted Answer

An increase in the Bank of Canada's short-term nominal interest rate will shift the MP curve up, leading to a decrease in real GDP as higher interest rates typically reduce investment and consumption.

Assume the Economy Is Initially in Equilibrium Where Potential GDP