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The Economy Shown Here Begins at a 0% Output Gap

Question 95

Multiple Choice

The economy shown here begins at a 0% output gap. Now suppose that banks begin to fear the risk of default and the risk premium rises by 2%. If inflation expectations remain unchanged, the actual inflation rate will be:
The economy shown here begins at a 0% output gap. Now suppose that banks begin to fear the risk of default and the risk premium rises by 2%. If inflation expectations remain unchanged, the actual inflation rate will be: A) 2% higher. B) 1% higher. C) 1% lower. D) 4% lower.


A) 2% higher.
B) 1% higher.
C) 1% lower.
D) 4% lower.

Correct Answer:

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