Question 1

If the Bank of Canada announces that its target for the overnight interest rate is rising from 4 percent to 4.25 percent,how do you expect workers and firms to react?

Accepted Answer

When the Bank of Canada announces that its target for the overnight interest rate is rising from 4 percent to 4.25 percent, workers and firms will expect borrowing to become more expensive. As a result, they will reduce their consumption and investment spending, which will reduce aggregate demand and inflation.

Question 2

What does it mean to say that workers and firms have rational expectations?

Accepted Answer

The answer of What does it mean to say that...

Question 3

Contractionary monetary policy will result in

Accepted Answer

Contractionary monetary policy involves reducing the money supply and increasing interest rates to decrease inflationary pressures. As a result, higher interest rates will be the outcome, making it an effective tool for combating inflation.

Question 4

Figure 13.11  Alt text for Figure 13.11: In figure 13.11,a graph of the Phillips curve.
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 on the bottom end of both lines.Point B is plotted half way along the short-run Philips Curve 1.Long-run Philips Curve,intersects the short-run Philips Curve 2,at point C in the top half of both lines.Point D is plotted more than half-way along 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 supply shock,such as rising oil prices,would be depicted as a movement from ________.

Accepted Answer

The answer of Figure 13.11  Alt text for Figure...

Question 5

If expectations are adaptive,how will the economy adjust to a new long-run equilibrium in response to expansionary monetary policy? Support your answer with a graph of the Phillips curve.

Accepted Answer

The answer of If expectations are adaptive,how will the economy...

Question 6

In order to promote price stability as the long-term goal of monetary policy,Bank of Canada Governor John Crow and the minister of finance set inflation targets with a band of plus or minus one percentage point around them.Through the late 1980s and early 1990s Canada saw ________ and ________.

Accepted Answer

Through the late 1980s and early 1990s, Canada experienced disinflation and high unemployment. Disinflation refers to a slowdown in the rate of inflation, indicating that prices were increasing at a slower pace, while high unemployment means a significant portion of the workforce was without jobs. This period was marked by efforts to stabilize prices and manage economic challenges.

Question 7

What impact does expansionary monetary policy have on the short-run Phillips curve if consumers and firms expect the expansionary monetary policy to increase inflation?

Accepted Answer

An expansionary monetary policy that is expected to increase inflation leads to a shift of the short-run Phillips curve upward, indicating an inverse relationship between inflation and unemployment. This is because when consumers and firms expect inflation, they demand higher wages and prices, leading to an increase in production costs and ultimately reducing the employment and output levels. Therefore, the Phillips curve shifts up, reflecting the new tradeoff between inflation and unemployment.

Question 8

Use the information below to explain adjustments that move the economy to a long-run equilibrium.Assume that firms and workers have adaptive expectations.
The current unemployment rate = 7%.
The natural rate of unemployment = 5.5%.
Last year's inflation rate = 5%.
This year's inflation rate = 4%.

Accepted Answer

The answer of Use the information below to explain adjustments...

Question 9

During a time when the inflation rate is increasing each year for a number of years,are adaptive expectations or rational expectations likely to give more accurate forecasts? Briefly explain.

Accepted Answer

The answer of During a time when the inflation rate...

Question 10

A reduction in the rate of inflation is referred to as

Accepted Answer

Disinflation is a moderation in the rate of inflation, which means prices are still rising but at a slower pace. It differs from deflation, which is a decrease in the overall price level in the economy, and recession, which is a decline in economic activity. Unemployment and revaluation are not related to inflation.

Question 11

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

Accepted Answer

Contractionary monetary policy will lead to higher interest rates and reduced aggregate demand, which in turn will decrease inflation. This will cause a downward shift of the short-run Phillips curve, as now the same level of inflation can be achieved with a higher level of unemployment. Options B, C and D are not valid as they are the opposite of what we would expect, and option E is not relevant in this situation.

Question 12

If the Bank of Canada's announcements about upcoming monetary policy decisions are not 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 not credible, firms and workers will be unable to accurately forecast changes in the rate of inflation. This is because they will not trust the Bank of Canada's announcements and will have to rely on their own imperfect information, resulting in inaccurate forecasts.

Question 13

If firms and workers have adaptive expectations,what impact will contractionary monetary policy have on inflation,unemployment,and the Phillips curve?

Accepted Answer

The answer of If firms and workers have adaptive expectations,what...

Question 14

A falling price level is called ________ and a fall in the rate of inflation is called ________.

Accepted Answer

A falling price level is referred to as deflation, whereas a decrease in the rate of inflation is known as disinflation. Option D is the only one that correctly matches these terms. Option A states that a fall in the rate of inflation is called a contraction, which is incorrect. Option B states that a falling price level is called a contraction, which is also incorrect. Option C incorrectly pairs disinflation with deflation. Option E pairs deflation with "under inflation," which is not a known term.

Question 15

If the current unemployment rate is 5%,under which of the following circumstances would you expect the Bank of Canada to use expansionary monetary policy?

Accepted Answer

The answer of If the current unemployment rate is 5%,under...

Question 16

Figure 13.11  Alt text for Figure 13.11: In figure 13.11,a graph of the Phillips curve.
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 on the bottom end of both lines.Point B is plotted half way along the short-run Philips Curve 1.Long-run Philips Curve,intersects the short-run Philips Curve 2,at point C in the top half of both lines.Point D is plotted more than half-way along 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.The Bank of Canada governor and the minister of finance's response to high inflation of the late 1980s is depicted in the figure above as a movement from ________.

Accepted Answer

The movement from short-run Philips Curve 1 at point A to short-run Philips Curve 2 at point C represents the Bank of Canada governor and the minister of finance's response to high inflation of the late 1980s. The movement from point C to point D on short-run Philips Curve 2 represents a temporary increase in the unemployment rate, which reduces inflation in the short run. Finally, the movement from point D to point A on the long-run Philips Curve represents a return to the natural rate of unemployment and the long-run equilibrium level of inflation. Therefore, the correct answer is C.

Question 17

The increases in oil prices in 1974 due to OPEC's actions caused the short-run aggregate supply curve to shift to the left.Canada saw increases in both unemployment and inflation as a result.The Bank of Canada could not address both increased unemployment and increased inflation because

Accepted Answer

The Bank of Canada could not address both increased unemployment and increased inflation because expansionary monetary policy which would lower unemployment would further increase inflation, and contractionary monetary policy which would lower inflation would further increase unemployment. Therefore, neither approach could solve the problem and the bank was forced to make a difficult choice between the two.

Question 18

Over the past two decades,whenever changes in Bank of Canada policy have been announced,

Accepted Answer

The statement "the changes have actually taken place" implies that there have been no significant roadblocks or attempts to negate the changes by the government or parliament.

Question 19

Which of the following could increase unemployment and inflation simultaneously?

Accepted Answer

An increase in oil prices leads to a decrease in aggregate supply and an increase in costs for businesses, which could lead to higher prices for consumers (inflation) and lower output and employment (unemployment).

Question 20

Figure 13.11  Alt text for Figure 13.11: In figure 13.11,a graph of the Phillips curve.
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 on the bottom end of both lines.Point B is plotted half way along the short-run Philips Curve 1.Long-run Philips Curve,intersects the short-run Philips Curve 2,at point C in the top half of both lines.Point D is plotted more than half-way along 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 a contractionary monetary policy to lower inflation after a supply shock,like that pursued by the Bank of Canada in 1989,would result in a movement from ________.

Accepted Answer

According to the short-run Phillips Curve 1, a contractionary monetary policy would result in a movement from point A to point D. Then, the economy would move along the short-run Phillips Curve 2 from point D to point C. Finally, the economy would adjust in the long-run to reach the long-run Phillips Curve at point A. Therefore, the correct answer is D) C to A.

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