Figure 14.3 -Refer to Figure 14.3.Suppose the Economy Is Initially at Long-Run

Multiple Choice

Figure 14.3

-Refer to Figure 14.3.Suppose the economy is initially at long-run equilibrium and the Bank of Canada increases the target inflation rate,and to hit this rate,it must reduce the real interest rate.The economy then reaches a new,short-run equilibrium point.Assuming expectations are adaptive,the next movement will result in real GDP

A) decreasing back to potential GDP.
B) increasing beyond potential GDP.
C) increasing back to potential GDP.
D) declining below potential GDP.