Assume the economy is initially in equilibrium where potential GDP equals real GDP.If the expected inflation rate,the term structure effect,and the default-risk premium are constant and the Bank of Canada wants to lower the inflation rate,the Bank of Canada could ________ the target short-term nominal interest rate,which will result in real GDP being ________ potential GDP.
A) increase; greater than
B) increase; less than
C) decrease; greater than
D) decrease; less than

Question

Quizplus · Accepted Answer

Increasing the target short-term nominal interest rate will reduce aggregate demand, leading to a decrease in real GDP below potential GDP, thus helping to lower the inflation rate.

Assume the Economy Is Initially in Equilibrium Where Potential GDP