The economy shown here begins at a 0% output gap. Now suppose that banks begin to fear the risk of default and the risk premium rises by 2%. If inflation expectations remain unchanged, the actual inflation rate will be:

A)2% higher.
B)1% higher.
C)1% lower.
D)4% lower.

Question

The economy shown here begins at a 0% output gap. Now suppose that banks begin to fear the risk of default and the risk premium rises by 2%. If inflation expectations remain unchanged, the actual inflation rate will be:

A)2% higher. 
B)1% higher. 
C)1% lower. 
D)4% lower.

Quizplus · Accepted Answer

The Answer of The economy shown here begins at a 0% output gap. Now suppose that banks begin to fear the risk of default and the risk premium rises by 2%. If inflation expectations remain unchanged, the actual inflation rate will be:

A)2% higher. 
B)1% higher. 
C)1% lower. 
D)4% lower.

The Economy Shown Here Begins at a 0% Output Gap