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.

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Definitions:

Observable Behaviours

Actions or responses of an individual that can be directly seen and measured.

Consciousness

Being able to understand and reflect on one's own life, feelings, ideas, environment, and personal experiences.

Watson

John B. Watson, an American psychologist who established the psychological school of behaviorism, emphasizing the study of observable behaviors.

Highly Subjective

Refers to judgments or opinions that are greatly influenced by personal feelings or beliefs rather than by objective facts.