Assume the economy is initially in equilibrium where potential GDP equals real GDP.If the expected inflation rate,the term structure effect,and the default-risk premium are constant and the Bank of Canada wants to ________ the inflation rate,the Bank of Canada could lower the target short-term nominal interest rate,which will result in an output gap which is ________.
A) raise; greater than zero
B) raise; less than zero
C) lower; greater than zero
D) lower; less than zero

Question

Quizplus · Accepted Answer

The Bank of Canada can lower the target short-term nominal interest rate to raise the inflation rate. This will result in an output gap that is greater than zero, as the economy will move into a period of expansion.

Assume the Economy Is Initially in Equilibrium Where Potential GDP