Suppose That the Bank of Canada Is Following a Rule

question 242

Multiple Choice

Suppose that the Bank of Canada is following a rule that takes both inflation and business cycles into account when setting the overnight rate.Also suppose that the inflation rate in the economy is 3% and the unemployment rate is 2% below the natural rate.The economy has a(n) :

• A) inflationary gap since the inflation rate is high.
• B) recessionary gap since the economy is not producing potential GDP.
• C) inflationary gap since actual real GDP exceeds potential real GDP.
• D) recessionary gap since potential real GDP exceeds actual real GDP.

---

Definitions:

Deadweight Loss

An economic inefficiency occurring when there is an imbalance between supply and demand leading to a loss of economic value, often caused by government interventions like taxes or subsidies.

Equilibrium Quantity

The amount of products or services available and sought after at the market's balance price.

Supply Curve

A graphical representation that shows the relationship between the price of a good and the quantity of the good that producers are willing to supply.

Buyer's Value

The maximum amount that a buyer is willing to pay for a good or service, reflecting the personal value the buyer attributes to the product.