Question 1

Figure 13.11  Alt text for Figure 13.11: In figure 13.11, a graph shows the short-run and long-run Phillips curves.
Long description for Figure 13.11: The x-axis is labelled, unemployment rate percent, and the y-axis is labelled, inflation rate percent per year.A straight line labelled, short-run Philips Curve 1, begins at the top left corner and slopes down to the bottom center.A straight line labelled, short-run Philips Curve 2, follows the same slope as Curve 1, but is plotted to the right.A straight line labelled, long-run Philips Curve, is perpendicular to the x-axis, and intersects the short-run Philips Curve 1 at point A near the bottom end of both lines.Point B is plotted half way along the short-run Philips Curve 1.Long-run Philips Curve intersects short-run Philips Curve 2 at point C near the top half of the curves.Point D is plotted more than half way along the short-run Philips Curve 2.Points E and F are plotted close to the left and right ends, respectively, of the short-run Philips Curve 2.
-Refer to Figure 13.11.A follower of the new classical macroeconomics would argue that ________, like that pursued by the Bank of Canada in 1979, would result in a movement from C to A.

Accepted Answer

A follower of the new classical macroeconomics believes in the long-run neutrality of money and that any attempt to manipulate aggregate demand through monetary or fiscal policy will only have short-term effects on the economy. Therefore, they would argue that contractionary monetary policy, like that pursued by the Bank of Canada in 1979, would result in a movement from point C to point A on the Phillips curve, indicating a decrease in inflation and an increase in unemployment in the short-term, but with no permanent effect on the unemployment rate in the long-run.

Question 2

Leverage is

Accepted Answer

Leverage refers to the amount of debt an investor assumes in making an investment. It is the ratio of the amount of money borrowed to the total assets of the investor, and it can be used as a proxy for the level of risk involved in an investment.

Question 3

The 1989-1993 Bank of Canada adoption of inflationary targets led to substantial reductions in the inflation rate, but it came at the cost of

Accepted Answer

The adoption of inflation targets by the Bank of Canada led to higher interest rates to control inflation, which in turn resulted in higher unemployment levels as economic activity slowed down.

Question 4

If the Bank of Canada's announcements about upcoming monetary policy decisions are credible, which of the following would you expect to see?

Accepted Answer

If the Bank of Canada's announcements about upcoming monetary policy decisions are credible, firms and workers will be able to better forecast changes in the rate of inflation. This will lead to more accurate expectations and better decision-making by economic agents.

Question 5

If the Bank of Canada announces that its target for the overnight interest rate is falling from 3 percent to 2.25 percent, how would you expect workers and firms to react?

Accepted Answer

When the Bank of Canada announces a decrease in the overnight interest rate, it stimulates the economy by making it cheaper for banks to lend money, which encourages borrowing by firms and consumers. As a result, workers and firms will increase their consumption and investment spending, which will increase aggregate demand and inflation. This is because it becomes easier and cheaper for individuals and firms to take out loans and invest in businesses, thereby stimulating overall demand in the economy, leading to higher levels of inflation as well.

Question 6

If the Bank of Canada chooses to fight high unemployment with expansionary monetary policy and firms and consumers expect this policy to increase inflation, which of the following would you expect to see?

Accepted Answer

An upward shift of the short-run Phillips curve is expected because if firms and consumers anticipate inflation due to expansionary monetary policy, they will adjust their expectations and behavior accordingly. This adjustment can lead to higher wage demands and prices, moving the short-run Phillips curve upward as inflation expectations become incorporated into economic decisions.

Question 7

Figure 13.10  Alt text for Figure 13.10: In figure 13.10, a graph comparing unemployment rate and inflation rate.
Long description for Figure 13.10: The x-axis is labelled, unemployment rate percent, and the y-axis is labelled, inflation rate percent per year.3 points; A, B, and C are plotted such that A and B share equivalent y-axis values, and B and C share equivalent x-axis values.
-Refer to Figure 13.10.A response to persistent ________ due to ongoing expansionary monetary policy is depicted in the figure above as a movement from C to A to B.

Accepted Answer

The graph shows a positive relationship between inflation rate and unemployment rate, meaning that as inflation rate increases, so does the unemployment rate. A movement from point C to point A and then to point B represents a response to persistent high inflation due to ongoing expansionary monetary policy. As the expansionary monetary policy continues, the inflation rate increases, leading to a decrease in unemployment rate from C to A. However, as the inflation rate keeps increasing, eventually it leads to a higher unemployment rate again at point B. Therefore, the best choice for the persistent issue depicted in the graph is high inflation (C).

Question 8

Deflation refers to

Accepted Answer

Deflation refers to a sustained decrease in the general price level of goods and services, indicating a contraction in the economy. Option A may be the result of deflation but is not the definition of deflation. Option C is a specific example of deflation in a particular sector, and not the definition of deflation.

Question 9

Figure 13.11  Alt text for Figure 13.11: In figure 13.11, a graph shows the short-run and long-run Phillips curves.
Long description for Figure 13.11: The x-axis is labelled, unemployment rate percent, and the y-axis is labelled, inflation rate percent per year.A straight line labelled, short-run Philips Curve 1, begins at the top left corner and slopes down to the bottom center.A straight line labelled, short-run Philips Curve 2, follows the same slope as Curve 1, but is plotted to the right.A straight line labelled, long-run Philips Curve, is perpendicular to the x-axis, and intersects the short-run Philips Curve 1 at point A near the bottom end of both lines.Point B is plotted half way along the short-run Philips Curve 1.Long-run Philips Curve intersects short-run Philips Curve 2 at point C near the top half of the curves.Point D is plotted more than half way along the short-run Philips Curve 2.Points E and F are plotted close to the left and right ends, respectively, of the short-run Philips Curve 2.
-Refer to Figure 13.11.A(n)________ would be depicted as a movement from A to D to C.

Accepted Answer

A supply shock, such as rising oil prices, would cause a movement from point A to D to C. This is because an increase in oil prices would lead to an increase in production costs, which would shift the short-run Phillips Curve 1 upward to the left, from point A to D. As a result, in the short run, the economy would experience higher inflation and higher unemployment. In the long run, however, the economy would adjust and the short-run Phillips Curve 2 would shift upward to the left, intersecting with the long-run Phillips Curve at point C. This would result in higher unemployment but no change in inflation.

Question 10

In the aftermath of the global recession, ________ has/have been discredited as an indicator of monetary policy, and central banks have been led to look elsewhere.

Accepted Answer

The short-term nominal interest rate has been discredited as an indicator of monetary policy after the global recession, as central banks found that it was not sufficient in predicting and controlling inflation. As a result, central banks have turned to other measures such as inflation targeting, forward guidance, and balance sheet policies to guide their actions.

Question 11

The current approach to monetary policy is based on the new Keynesian model and is expressed in terms of the short-term nominal interest rate, such as the overnight interest rate in Canada and the federal funds rate in the United States.

Accepted Answer

The statement is true. The current approach to monetary policy in many countries, including Canada and the United States, is based on the new Keynesian model, which focuses on adjusting the short-term nominal interest rate to achieve macroeconomic goals such as inflation targets and output stabilization. The overnight interest rate in Canada and the federal funds rate in the United States are examples of the nominal interest rates that central banks use to implement their monetary policy.

Question 12

Which of the following would shift the short-run Phillips curve to the right?

Accepted Answer

A sudden and unexpected increase in the price of oil would lead to higher production costs, causing inflation to rise at any given level of unemployment, thus shifting the short-run Phillips curve to the right.

Question 13

Expansionary monetary policy will result in

Accepted Answer

Expansionary monetary policy involves increasing the money supply, which will lead to a decrease in interest rates. This is because there is more money available to borrow, so lenders will lower interest rates to remain competitive. However, expansionary monetary policy can also lead to increased inflation and an increase in aggregate demand, so options B and C are incorrect. Option D is also incorrect as expansionary monetary policy is a tool used by central banks to stimulate the economy, so it does not necessarily result in a loss of credibility. Therefore, the best choice is A.

Question 14

Disinflation refers to

Accepted Answer

Disinflation refers to a reduction in the rate of inflation, not necessarily a decrease in the price level. It means that the increase in prices is occurring at a slower rate.

Question 15

If the economy experiences a(n)________, inflation will rise and real GDP will fall.

Accepted Answer

A negative supply shock is a sudden decrease in the supply of goods and services, which leads to an increase in prices and a decrease in real GDP. This is because the cost of production increases, causing firms to reduce output, and consumers to reduce spending due to higher prices. Inflation increases because producers pass on the higher costs to consumers, and real GDP decreases due to the decrease in production.

Question 16

When reducing the overnight rate was no longer seen as an option to deal with the global recession, some central banks began

Accepted Answer

When reducing the overnight rate was no longer effective, some central banks began implementing quantitative easing measures, which involve purchasing securities from commercial banks to increase the money supply and stimulate lending and economic activity. This is typically done by creating new money digitally rather than relying on reducing interest rates. Other options listed, such as reducing reserve ratios, reducing tax rates, selling government securities, or destroying currency, may have their own unique effects on the economy, but are not direct replacements for the overnight rate as a tool of monetary policy.

Question 17

The Bank of Canada's inflation targeting policy has led to inflation ________ since 1996.

Accepted Answer

The Bank of Canada's inflation targeting policy has been successful in keeping inflation within a range of 1 to 3 percent since 1996, which indicates that inflation has remained relatively stable throughout this period.

Question 18

A fall in the inflation rate from 8 percent to 2 percent is an example of deflation.

Accepted Answer

A fall in the inflation rate from 8 percent to 2 percent is not an example of deflation. Deflation occurs when the overall price level of goods and services in an economy declines. A decrease in the inflation rate still indicates a rise in prices but at a slower rate.

Question 19

The short-run Phillips curve shifting down following the 1989 Bank of Canada announcement that they were adopting inflation targets shows that workers and firms

Accepted Answer

The short-run Phillips curve shifting down following the 1989 Bank of Canada announcement that they were adopting inflation targets indicates that workers and firms had rational expectations and trusted Bank of Canada announcements. This is because they adjusted their behavior based on the credible commitment made by the central bank to keep inflation low, which led to lower inflation expectations and a downward shift in the Phillips curve.

Question 20

In the aftermath of the global financial crisis, it is generally accepted that record ________ on Wall Street played a significant role.

Accepted Answer

High levels of leverage, or borrowing money to invest in financial assets, were a key factor in the financial crisis. When the value of these assets dropped, it left banks and investors with enormous losses and a lack of liquidity. This contributed to the collapse of major financial institutions and the subsequent economic recession.

Quiz 13: Inflation, Unemployment, and Bank of Canada Policy