Assume the Economy Is Initially in Equilibrium Where Potential GDP

question 63

Multiple Choice

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

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Definitions:

Net Present Value

A financial metric that calculates the difference between the present value of cash inflows and outflows over a period, used to assess the profitability of investments.

Rule of 72

A mathematical rule to estimate the number of years required to double an investment at a given annual fixed interest rate.

$10,000

A numerical figure representing a specific amount of money, notable in various financial contexts.

Cash Flows

signify the net amount of cash being transferred into and out of a business, crucial for assessing liquidity, flexibility, and overall financial health.