Based on Observation 2, what impact will the policy changes have on the trend rate of growth for Country Y?

A. Negative B. Neutral C. Positive Neshie Wakuluk is an investment strategist who develops capital market expectations for an investment firm that invests across asset classes and global markets. Wakuluk started her career when the global markets were experiencing significant volatility and poor returns; as a result, she is now careful to base her conclusions on objective evidence and analytical procedures to mitigate any potential biases.
Wakuluk’s approach to economic forecasting utilizes a structural model in conjunction with a diffusion index to determine the current phase of a country’s business cycle. This approach has produced successful predictions in the past, thus Wakuluk has high confidence in the predictions. Wakuluk also determines whether any adjustments need to be made to her initial estimates of the respective aggregate economic growth trends based on historical rates of growth for Countries X and Y (both developed markets) and Country Z (a developing market). Exhibit 1 summarizes Wakuluk’s predictions:

Wakuluk assumes short-term interest rates adjust with expected inflation and are procyclical. Wakuluk reviews the historical short-term interest rate trends for each country, which further confirms her predictions shown in Exhibit 1.
Wakuluk decides to focus on Country Y to determine the path of nominal interest rates, the potential economic response of Country Y’s economy to this path, and the timing for when Country Y’s economy may move into the next business cycle. Wakuluk makes the following observations:

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EXHIBIT 1 Prediction for Current Phase of the Business Cycle Country X Initial Recovery Country Y Contraction Country Z Late Upswing