Question 1

"Supply inflation" refers to

Accepted Answer

Supply inflation refers to inflation that arises from a leftward shift of the AS curve, indicating that output is decreasing while input costs are increasing. This occurs due to supply-side factors such as a decrease in productivity, an increase in the cost of raw materials, or a decrease in the availability of resources. It is not the result of excess demand for factors of production, which would create demand-pull inflation.

Question 2

FIGURE 29-3 -Refer to Figure 29-3.The movement of the economy from E₀ to E₁ was likely caused by

Accepted Answer

The answer of  FIGURE 29-3
-Refer to Figure 29-3.The movement...

Question 3

Suppose that an increase in world oil prices leads to greater demand for Canadian oil exports.If the Bank of Canada reduces the overnight interest rate in response to this increase in AD,this is called

Accepted Answer

Monetary validation occurs when a central bank adjusts monetary policy, such as lowering interest rates, to accommodate an increase in aggregate demand, preventing inflation from rising.

Question 4

Isolated negative aggregate supply shocks,in the absence of monetary validation,will

Accepted Answer

Isolated negative aggregate supply shocks, which typically lead to higher prices and lower output, can be self-correcting over time through lower nominal wages. As wages slowly fall, firms reduce costs and eventually output returns to its natural level. This process can take some time, however, it does not require government intervention or changes in aggregate demand.

Question 5

If the central bank responds to a single negative supply shock with monetary validation,we can expect an increase in

Accepted Answer

If the central bank responds to a negative supply shock with monetary validation, it will result in an increase in the money supply. However, this will also lead to an increase in costs and the price level. As a result, the output gap will remain the same, and there may be some increase in unemployment as well. Therefore, the best choice is D, which includes an increase in costs, the price level, and the money supply.

Question 6

Suppose the AS curve is continuously shifting upward due to expectations of future inflation.If there is repeated monetary validation of this supply shock,

Accepted Answer

If the AS curve is continuously shifting upward due to expectations of future inflation and there is repeated monetary validation of this supply shock, it will lead to ongoing inflation. The increase in prices will not be a one-time event, but rather a continuous process as expectations of future inflation become embedded in the economy. Unemployment may also rise initially due to the supply shock, but over time, as prices adjust, workers will have higher nominal wages leading to higher real wages. However, the focus of the question is on the outcome of the ongoing supply shock and monetary validation, which points towards ongoing inflation.

Question 7

If the Bank of Canada validates a positive AD shock,

Accepted Answer

A positive AD shock can lead to increased demand and potentially higher inflation. Validating the shock means that the Bank of Canada believes the increased demand is sustainable, which increases the risk of continued inflation. Therefore, choice B is the best answer. The other options are not likely outcomes of a validated positive AD shock.

Question 8

Economists use the term "monetary validation" to refer to

Accepted Answer

Monetary validation refers to the increase in the money supply in response to a supply or demand shock that raises the price level. This is done to ensure that the money supply is sufficient to meet the increased demand for money without causing inflation. The term "validation" refers to the validation of the increased demand for money through an increase in the money supply.

Question 9

Suppose the economy is in a long-run equilibrium.The AS curve now shifts upward due to a one-time increase in the price of raw materials.If the central bank validates this supply shock,

Accepted Answer

Validating the supply shock means that the central bank will increase the money supply to keep the interest rate constant. This increase in money supply will cause an upward shift in the aggregate demand curve, resulting in a higher price level. However, there will not be a recessionary gap because the central bank is taking actions to maintain aggregate demand. Option A and B are incorrect because there will not be further inflation nor will the AS curve shift upward again. Option D and E are incorrect because no recessionary gap will be created.

Question 10

An inflation that begins as a result of any demand or supply shock will eventually come to a halt

Accepted Answer

Inflation that starts due to a demand or supply shock requires monetary validation to persist. Without an increase in the money supply to accommodate or validate the higher prices, the inflationary pressures will eventually subside as the economy cannot sustain higher price levels without corresponding increases in money supply.

Question 11

Suppose the economy is at full employment and the AS curve shifts upward due to a once-and-for-all increase in the price of oil.If the central bank does not respond to this shock,

Accepted Answer

When the AS curve shifts upward due to an increase in the price of oil, it will cause a decrease in output and increase in prices. Without any response from the central bank, the nominal wages will also adjust upward leading to a decrease in the demand for labor and hence the output. This will create a recessionary gap. However, over time, this will cause a decrease in prices due to excess supply leading to a shift back downwards of the AS curve. Hence the best choice is B.

Question 12

FIGURE 29-3 -Refer to Figure 29-3.Suppose the economy is at E₁ and that there is no policy response by the Bank of Canada to this recessionary gap.Compared to the price level and real GDP at ,the economy will tend towards a new long-run equilibrium characterized by a(n)

Accepted Answer

At the initial equilibrium point E₁, the economy is producing output below its potential level and the price level is higher than the long-run equilibrium. The lack of policy response from the Bank of Canada will allow the economy to adjust towards the new long-run equilibrium through a decrease in the price level and a decrease in real GDP. Therefore, the economy will tend towards a new equilibrium point with a lower price level and real GDP at the potential level. Choice D is the only option that describes this situation.

Question 13

If the economy is faced with continued negative supply shocks,such as annual wage increases for unionized workers,and there is no monetary validation,we can expect

Accepted Answer

If there are continued negative supply shocks, such as annual wage increases for unionized workers, and there is no monetary validation, then the cost of production will increase, leading to a decrease in supply and a shift to the left in the aggregate supply curve. This will result in higher prices and lower output, leading to rising unemployment until the wage increases cease or are offset by other wage decreases. Therefore, option C is the most appropriate choice.

Question 14

There can be strong pressure on the Bank of Canada to validate a large negative supply shock.The motive behind this pressure is

Accepted Answer

The pressure to validate a large negative supply shock is mainly to acknowledge the slow adjustment in wages, which can delay the return to full employment. This is because wages often fall only very slowly, leading to a prolonged period of high unemployment. Therefore, validating the negative supply shock can help to mitigate public pressure on the Bank of Canada to enforce policies that may hurt the economy in the long run.

Question 15

A central bank might decide to "validate" a negative supply shock because

Accepted Answer

A negative supply shock can lead to a prolonged period of economic downturn as it takes time for wages and prices to adjust downwards. Validating the shock can allow the central bank to take action such as lowering interest rates or implementing expansionary monetary policy to mitigate the negative effects on the economy and restore full employment.

Question 16

Suppose that an increase in world oil prices leads to an increase in Canadian aggregate demand but no change in Canadian aggregate supply.The short-term effect on the Canadian price level would be called

Accepted Answer

An increase in world oil prices would likely lead to an increase in Canadian demand for oil, which would increase the cost of production and potentially increase prices for other goods and services as well. This is a demand-pull inflationary effect, where increased demand leads to higher prices. The other options are not relevant to this scenario.

Question 17

Suppose the Canadian economy is booming due to rising net exports and there is political pressure to maintain the "good times." If the Bank of Canada does so by implementing an expansionary monetary policy,it would

Accepted Answer

Implementing an expansionary monetary policy during a booming economy can overheat the economy, leading to higher inflation and potentially destabilizing economic conditions. Expansionary policies are typically used to combat recession, not to fuel an already booming economy.

Question 18

"Demand inflation" refers to

Accepted Answer

Demand inflation refers to the inflationary pressure created by an increase in demand in the economy, which results in an inflationary gap caused by a rightward shift of the AD curve. This means that the economy is producing beyond its capacity, resulting in upward pressure on the price level. Therefore, choice E, which refers to the inflation resulting from any inflationary gap caused by a rightward shift of the AD curve, is the best answer. Choices A, B, C, and D do not accurately describe demand inflation.

Question 19

The act of "monetary validation" by a central bank can

Accepted Answer

Monetary validation by a central bank involves the central bank accommodating inflationary pressures by increasing the money supply. This can perpetuate inflation because it increases the amount of money chasing the same amount of goods and services, leading to sustained or increased price levels.

Question 20

FIGURE 29-3 -Refer to Figure 29-3.The movement of the economy from E₁ to E₂ was likely caused by

Accepted Answer