When there is an expansionary gap,inflation will __________,in response to which the Bank of Canada will ________ real interest rates,and output will _________.
A) decrease;raise;decrease
B) decrease;lower;increase
C) decrease;lower;decrease
D) increase;raise;decrease
E) increase;lower;increase

Question

Quizplus · Accepted Answer

When there is an expansionary gap (i.e., actual output is greater than potential output), demand for goods and services exceeds the economy's capacity to produce them, leading to upward pressure on prices and inflation. In response, the Bank of Canada will raise real interest rates (i.e., nominal interest rates adjusted for inflation) to cool down the economy and reduce inflationary pressures. Higher real interest rates will reduce investment and consumption spending, leading to a decrease in output in the short run. Therefore, the correct answer is D.

When There Is an Expansionary Gap,inflation Will __________,In Response to Which