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

Question

Quizplus · Accepted Answer

If the economy has already passed the peak of the boom and is producing above potential GDP, it is likely that inflationary pressures have built up. Implementing contractionary policy at this point will result in a decrease in GDP, but if it is not implemented until after the peak, the decrease in GDP may be too large as the economy has already overheated. This can lead to a recession or even a depression.

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