Assume the Economy Is Initially in Equilibrium Where Potential GDP

Multiple Choice

Assume the economy is initially in equilibrium where potential GDP equals real GDP.If the expected inflation rate,the term structure effect,and the default-risk premium are constant and the Bank of Canada wants to lower the inflation rate,the Bank of Canada could ________ the target short-term nominal interest rate,which will result in real GDP being ________ potential GDP.

A) increase; greater than
B) increase; less than
C) decrease; greater than
D) decrease; less than