Suppose the Inflation Rate Is 3 Percent and the Output

question 42

Multiple Choice

Suppose the inflation rate is 3 percent and the output gap is -1 percent. Using the Taylor rule, the Bank of Canada sets the overnight loans rate equal to

• A)5 percent.
• B)6 percent.
• C)4 percent.
• D)1 percent.
• E)5.5 percent.

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Definitions:

Bad Debt Risk

The risk associated with the possibility that a debtor will not fulfill their obligations as outlined in the terms and conditions.

Commercial Paper Instruments

Short-term unsecured promissory notes issued by companies to finance their immediate cash needs.

Prime Rate

The interest rate banks charge their largest and best commercial customers.

Compensating Balances

Minimum balance requirements imposed by banks on corporate customers in exchange for banking services or loans.