Question 2 Chapters 10, 11 & 12 Recently the Bank of Canada has come under significant pressure to not raise interest rates in order to "help" the economy. Hint: Assume Canada is a closed economy. a) b) For these groups, including some Canadian chartered banks, to request this action, what must these parties be assuming about the present economic performance of Canada? Explain in words only. Your answer should focus on the present level of real GDP, employment & unemployment. d) Suppose the Bank of Canada listens to some of this advice and it decides to lower the interest rate. This means that part b is a continuation of part a. Using words and one IS/LM diagram explain how the bank would do this and what impact this impact this would have on real GDP, consumption, investment, the real interest rate, employment, unemployment, and the real money supply in the short-run. c) If the Bank of Canada were to undertake this change of policy (in part B) what would the long-run impact of this be on inflation and/or deflation for the economy? That is would the rate of inflation (or deflation) go up, down or stay the same in the longer term as a result of this policy? Use one AS/AD diagram to help answer this sub-question on this diagram clearly label the initial short-run and new long-run equilibria. Assuming the Bank of Canada has a policy goal of keeping the rate of inflation within the range between 1% to 3% per year would this policy change help meet this goal or to move away from this goal? Explain in words only how/why you feel this is so. Aside: The Bank of Canada really does have an inflation target like described above.
Question 2 Chapters 10, 11 & 12 Recently the Bank of Canada has come under significant pressure to not raise interest rates in order to "help" the economy. Hint: Assume Canada is a closed economy. a) b) For these groups, including some Canadian chartered banks, to request this action, what must these parties be assuming about the present economic performance of Canada? Explain in words only. Your answer should focus on the present level of real GDP, employment & unemployment. d) Suppose the Bank of Canada listens to some of this advice and it decides to lower the interest rate. This means that part b is a continuation of part a. Using words and one IS/LM diagram explain how the bank would do this and what impact this impact this would have on real GDP, consumption, investment, the real interest rate, employment, unemployment, and the real money supply in the short-run. c) If the Bank of Canada were to undertake this change of policy (in part B) what would the long-run impact of this be on inflation and/or deflation for the economy? That is would the rate of inflation (or deflation) go up, down or stay the same in the longer term as a result of this policy? Use one AS/AD diagram to help answer this sub-question on this diagram clearly label the initial short-run and new long-run equilibria. Assuming the Bank of Canada has a policy goal of keeping the rate of inflation within the range between 1% to 3% per year would this policy change help meet this goal or to move away from this goal? Explain in words only how/why you feel this is so. Aside: The Bank of Canada really does have an inflation target like described above.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Question 2
Chapters 10, 11 & 12
Recently the Bank of Canada has come under significant pressure to not raise interest rates in order
to "help" the economy. Hint: Assume Canada is a closed economy.
a)
b)
For these groups, including some Canadian chartered banks, to request this action, what must
these parties be assuming about the present economic performance of Canada? Explain in
words only. Your answer should focus on the present level of real GDP, employment &
unemployment.
d)
Suppose the Bank of Canada listens to some of this advice and it decides to lower the interest
rate. This means that part b is a continuation of part a. Using words and one IS/LM diagram
explain how the bank would do this and what impact this impact this would have on real
GDP, consumption, investment, the real interest rate, employment, unemployment, and the
real money supply in the short-run.
c) If the Bank of Canada were to undertake this change of policy (in part B) what would the
long-run impact of this be on inflation and/or deflation for the economy? That is would the
rate of inflation (or deflation) go up, down or stay the same in the longer term as a result of
this policy? Use one AS/AD diagram to help answer this sub-question on this diagram
clearly label the initial short-run and new long-run equilibria.
Assuming the Bank of Canada has a policy goal of keeping the rate of inflation within the
range between 1% to 3% per year would this policy change help meet this goal or to move
away from this goal? Explain in words only how/why you feel this is so. Aside: The Bank
of Canada really does have an inflation target like described above.
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