Suppose the Bank of Canada Has a Target Inflation Rate

question 54

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%.The profit-maximizing price for the Kindle in 2013 will be

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

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Definitions:

Bad Debts Expense

An expense account reflecting the cost of accounts receivable that a company does not expect to collect due to customer defaults.

Allowance Method

An accounting technique used to account for bad debts by estimating and recording uncollectible accounts receivable.

Outstanding Receivables

The total amount of money owed to a company by its customers for goods or services delivered but not yet paid for.

Allowance for Doubtful Accounts

A reserve for accounts receivable that may not be collectable, reducing the book value of accounts receivable to a more realistic value.