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

Multiple Choice

Figure 14.3

-Refer to Figure 14.3.uppose 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 the inflation rate

A) rising to π₂, the new long-run inflation rate.
B) falling to π₂, the new long-run inflation rate.
C) rising to π₃, the new long-run inflation rate.
D) falling back to π₁, the original long-run inflation rate.