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

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Question 51

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Which of the following is an appropriate policy for a central bank to follow if the economy is plagued with deflation?

A) increasing the target interest rate on overnight loans
B) using contractionary monetary policy to drive up interest rates
C) consistently pursuing policy to promote the credibility of the central bank
D) gradually raising the required reserve rate
E) sharply increasing the target for the overnight rate

F) B) and E)
G) A) and D)

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Question 52

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In a graph of unemployment rates (on the horizontal axis) versus inflation rates (on the vertical axis) , the short-run Phillips Curve is

A) downward sloping.
B) horizontal.
C) vertical.
D) upward sloping.

E) None of the above
F) A) and B)

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Question 53

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Figure 13.1 Alt text for Figure 13.1: In figure 13.1, a short-run Phillips curve. Long description for Figure 13.1: The x-axis is labelled, unemployment rate percent, and the y-axis is labelled, inflation rate percent per year.A straight line labelled, Philips curve, begins at the top left corner and slopes down to the end of the x-axis.Point A is plotted half way along the line.Point B is plotted to the right of point A.Point C is plotted is to the left of point A.Point D is plotted above this line, in the left center of the quadrant.Point E is plotted below this line, directly beneath point A. -Refer to Figure 13.1.Suppose that the economy is currently at point A.If the Bank of Canada engaged in contractionary monetary policy, where would the economy end up in the short run?

If expected inflation rises, the long-run Phillips curve will

If people assume that future rates of inflation will follow the pattern of inflation rates in the past, they are said to have

Figure 13.3 Alt text for Figure 13.3: In figure 13.3, a graph shows the shifts in the short-run and long-run Phillips curves. Long description for Figure 13.3: 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 short-run Philips curve 2 is indicated by a right pointing arrow.A straight line labelled, long-run Philips Curve 1 is perpendicular to the x-axis, begins from the x-axis value 5.5%.Long-run Philips Curve 1 intersects the short-run Philips Curve 1 at point (5.5%, 4.0) and intersects the Short-run Philips Curve 2 at point (5.5%, 5.5%) .A straight line labelled, long-run Philips Curve 2 is perpendicular to the x-axis, to right of the long-run curve 1, and begins from the x-axis value 6.8.Long-run Philips Curve 2 intersects the short-run Philips Curve 2 at point (6.8, 4.0) and the short-run Philips Curve 1 at a point on the bottom end of these lines, near the x-axis.The points of are connected to their respective coordinates on the x and y-axes with dotted lines. -Refer to Figure 13.3.The shifts shown in the short-run and long-run Phillips curves between period 1 and period 2 could be explained by

The major criticism of real business cycle models is

According to ________, the economy is normally at potential GDP.

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.

An increase in frictional unemployment will

Which of the following would decrease the natural rate of unemployment?

What can the Bank of Canada do to reduce the natural rate of unemployment?

If the Bank of Canada wants to reduce inflation from 4 percent to 3 percent permanently, how can that goal be achieved, and what impact will that have on employment in the short run and the long run? Support your answer with a graph of the Phillips curve in the short run and the long run.

Assume the unemployment rate is currently at the natural rate of 7%. The actual inflation rate is 2% and has been 2% for year. Further workers and firms believe the inflation rate will remain 2% in the future. If the Bank of Canada decides to increase the inflation rate to 5%, how could the Bank of Canada achieve this objective?

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

An increase in the expected inflation rate will

Figure 13.2 Alt text for Figure 13.2: In figure 13.2, a graph shows the short-run and long-run Phillips curves. Long description for Figure 13.2: The x-axis is labelled, unemployment rate (percent) .The y-axis is labelled, inflation rate (percent per year) .3 points; A (5, 3) , B (3.8%, 5.5%) , C (6, 1) are plotted on the graph.The points are connected to their respective coordinates on the x and y-axes with dotted lines.A straight line labelled, short-run Philips Curve, begins at the top left corner and slopes down to the bottom center, and passes through points A, B, and C.A straight line labelled, long-run Philips Curve, is perpendicular to the x-axis, begins from the x-axis value 5,and intersects the Short-run Philips Curve at point A. -Refer to Figure 13.2.Suppose the economy is at point C.If the Bank of Canada decreases the money supply so that inflation falls, the economy will ________ in the long run, holding all else constant.

Monetary policy has ________ impact on the long-run Phillips curve.

Based on the current discussions centered on the Bank of Canada's decision to engage in expansionary monetary policy, many economists are concerned that there is a trade-off between

If the rate of inflation in the economy is steady at 5 percent per year, how does the short-run Phillips curve predict that the unemployment rate will be changing, if at all? Does your answer change if inflation in the economy is 0 percent? Illustrate your answer with a Phillips curve.