Figure 12.2 -Refer to Figure 12.2.Suppose the economy is initially above potential GDP,and the actual inflation rate is greater than the expected inflation rate.If the Bank of Canada wants to achieve the goal of price stability,the economy's new equilibrium would be at ________,with ________. A) point B; lower inflation and a lower output gap B) point C; unchanged inflation and a lower output gap C) point A; higher inflation and a higher output gap D) point C; higher inflation and an unchanged output gap

Question

Quizplus · Accepted Answer

In order to achieve price stability, the Bank of Canada would need to decrease inflation, which means moving the economy to a lower point on the Phillips curve. This can be seen by comparing points A and B in the graph. Additionally, in order to move from an output level above potential GDP to potential GDP, the economy must have a negative output gap. This means that output needs to decrease, which is shown by the movement from point C to point B. Therefore, the correct answer is A: point B; lower inflation and a lower output gap.

Figure 12.2 -Refer to Figure 12.2.Suppose the Economy Is Initially Above Potential