Figure 14.3

-Refer to Figure 14.3.Suppose the economy is initially at long-run equilibrium and the Bank of Canada increases the target inflation rate,and to hit this rate,it must reduce the real interest rate.The economy then reaches a new,short-run equilibrium point.Assuming expectations are adaptive,the next movement will result in the economy reaching a new,long-run equilibrium at

Question

Figure 14.3

-Refer to Figure 14.3.Suppose the economy is initially at long-run equilibrium and the Bank of Canada increases the target inflation rate,and to hit this rate,it must reduce the real interest rate.The economy then reaches a new,short-run equilibrium point.Assuming expectations are adaptive,the next movement will result in the economy reaching a new,long-run equilibrium at

Quizplus · Accepted Answer

When the Bank of Canada reduces the real interest rate to increase the inflation rate, the economy initially moves to a short-run equilibrium with higher output and inflation. Over time, with adaptive expectations, inflation expectations adjust, and the economy moves to a new long-run equilibrium with higher inflation, typically at a point like C, which reflects the new higher inflation target.

Figure 14.3 -Refer to Figure 14.3.Suppose the Economy Is Initially at Long-Run