Table 11.5
-Refer to Table 11.5.Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2017 and in 2018 if the Bank of Canada does not use monetary policy.If the Bank of Canada uses monetary policy successfully to keep real GDP at its potential level in 2018, which of the following will be higher than if the Bank of Canada had taken no action?
A)real GDP and the unemployment rate
B)real GDP and the inflation rate
C)real GDP and potential GDP
D)potential GDP and the inflation rate
E)unemployment and the participation rate

Question

Table 11.5 
-Refer to Table 11.5.Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2017 and in 2018 if the Bank of Canada does not use monetary policy.If the Bank of Canada uses monetary policy successfully to keep real GDP at its potential level in 2018, which of the following will be higher than if the Bank of Canada had taken no action?
A)real GDP and the unemployment rate 
B)real GDP and the inflation rate 
C)real GDP and potential GDP 
D)potential GDP and the inflation rate 
E)unemployment and the participation rate

Quizplus · Accepted Answer

If the Bank of Canada uses monetary policy successfully to keep real GDP at its potential level in 2018, real GDP will be higher than it would have been without intervention. However, this may also lead to an increase in the inflation rate. Therefore, real GDP and the inflation rate will both be higher than if the Bank of Canada had taken no action. The other choices are incorrect as they do not accurately reflect the relationship between the variables and the effect of monetary policy on them.

Table 11.5 -Refer to Table 11.5.Consider the Hypothetical Information in the Table