Suppose that the economy is producing below potential GDP and the Bank of Canada implements the correct change in monetary policy, but not until after the economy has passed the trough of the recession.Then

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When the economy is below potential GDP and the central bank (in this case, the Bank of Canada) implements an expansionary monetary policy after the economy has passed the trough of the recession, the policy is aimed at increasing economic activity. However, if the timing is late, this could lead to the economy overheating, resulting in too large of an increase in GDP beyond the potential GDP, potentially causing inflationary pressures.

Suppose That the Economy Is Producing Below Potential GDP and the Bank