Suppose that the Bank of Canada is following a rule that takes both inflation and business cycles into account when setting the overnight rate.Also suppose that the inflation rate in the economy is 3% and the unemployment rate is 2% above the natural rate.The economy has a(n) :
A) inflationary gap since the inflation rate is high.
B) recessionary gap since the economy is not producing potential GDP.
C) inflationary gap since actual real GDP exceeds potential real GDP.
D) recessionary gap since potential real GDP exceeds actual real GDP.
Correct Answer:
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