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

Use the following information to draw a graph showing the short-run and long-run Phillips curves, and be sure your graph shows the point where the short-run and long-run Phillips curves intersect. Natural rate of unemployment = 4 percent Current rate of unemployment = 5 percent Expected inflation rate = 3 percent Current inflation rate = 2 percent

The long-run aggregate supply curve is ________, while the long-run Phillips curve is ________.

What actions could the Bank of Canada take to achieve consistent growth in real GDP at 4 percent per year?

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?

Ceteris paribus, in the short run following a decrease in the rate of growth in Aggregate Demand, we would expect to see an increase in the rate of unemployment and a decrease in the rate of inflation.

Figure 13.4 Alt text for Figure 13.4: In figure 13.4, a graph shows the shift in the short-run Phillips curve. Long description for Figure 13.4: The x-axis is labelled, unemployment rate percent.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 end of the x-axis.A straight line labelled, short-run Philips Curve 2, follows the same slope as curve 1, but is plotted to the right.The area between Curve 1 and Curve 2 is indicated by a right pointing arrow.A straight line labelled, long-run Philips Curve 1 is perpendicular to the x-axis, and begins from the x-axis value 5.0%.Long-run Philips Curve 1 intersects the short-run Philips Curve 1 at point (5.0%, 4.0)and intersects the short-run Philips Curve 2 at point (5.0%, 5.5%).Point (6.2, 4.0)is plotted toward the right end of the short-run Philips Curve 2.The points are connected to their respective coordinates on the x-axis and y-axis with dotted lines. -Refer to Figure 13.4.Consider the shift in the short-run Phillips curve shown in the above graph. This shift may be explained by

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

The expansionary monetary and fiscal policies of the 1960s resulted in

According to the short-run Phillips curve, which of the following would result in low rates of unemployment?

Workers at a local construction company are paid $32.50 per hour, and they have incorporated a 4 percent annual raise in their contracts to account for expected inflation.Explain how unexpected inflation of 2 percent will affect the real wages earned by these workers and the unemployment rate of these workers.

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

According to economists Robert Lucas and Thomas Sargent, when are the gains to accurately forecasting inflation highest?

Robert Shiller posed the following question to workers: "Imagine that next year the inflation rate unexpectedly doubles.How long would it probably take, in these times, before your income is increased enough so that you can afford the same things as you do today?" Shiller found that ________ percent of the workers he interviewed reported that it would take several years to restore the purchasing power of their wages or that this power would never be restored.

Models that focus on factors such as technology shocks rather than "monetary" explanations of fluctuations in real GDP are called

If the economy is producing at potential GDP,

If firms and workers have rational expectations, including knowledge of the policy being used by the Bank of Canada, the short-run Phillips curve will be

Deflation refers to

Suppose a candidate for Prime Minister makes a statement in a debate whereby he promises that he would encourage the Bank of Canada to permanently lower the unemployment rate to 3%.His opponents claim that this type of policy idea is mired in the 1960s and would only cause inflation.Explain what the opponent means.

Lucas and Sargent argue that the short-run trade-off between unemployment and inflation is caused by

Which of the following is not an appropriate policy for a central bank to follow if the economy is plagued with deflation?