Suppose the Bank of Canada Has a Target Inflation Rate

question 56

Multiple Choice

Suppose the Bank of Canada has a target inflation rate of 3%,always hits its target,and the inflation rate has been 3% for several years.Furthermore,assume Amazon sets the price of its Kindle Fire at $140 in 2012 and wants to keep the real price of the Kindle constant in order to maximize profits.Now suppose that the Bank of Canada announces on January 1,2013 that it will decrease its target rate for inflation to 1%.If Amazon has rational expectations,it will set its price for the Kindle in 2013 at

• A) $137.20.
• B) $140.00.
• C) $141.40.
• D) $144.20.

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