Reference no: EM133439518

The Bank of Canada raises the target for the overnight rate by a quarter of a percentage point to 4%.

OTTAWA - The Bank of Canada announced today that it is raising the target for the overnight rate by a quarter of a percentage point to 4%. It also increases the limits of the operating range for this rate by a quarter of a point [...].

The global economy is growing at a healthy pace, showing slightly more momentum than expected. This boom and the accompanying rise in many commodity prices, combined with strong domestic demand in Canada, have enabled the country's economy to record a robust rate of expansion, in line with the outlook set out by the Bank in the January Monetary Policy Report Update. At the same time, global competition and the past appreciation of the Canadian dollar continue to pose challenges for several sectors. All things considered, the Bank believes that the Canadian economy is operating at a level [...] equal to its productive capacity. High energy prices kept the rate of increase in the headline CPI in Canada slightly above the Bank's target. However, core inflation remained below 2% due to persistent downward pressure from the prices of imported consumer goods. Under these circumstances, the Bank has decided to increase the target for the overnight rate. [...]

In light of this outlook, the Bank estimates that it may need to raise the policy rate somewhat further in order to maintain the balance between aggregate supply and demand and to keep inflation at the target rate over the medium term [. ..].

Issue 1:

Identify the type of equilibrium (full employment, underemployment or overemployment) that characterized the Canadian economy in April 2006 as described in the quote above. Explain.

Issue 2:

Define natural unemployment and indicate its components.

Issue 3:

How did the unemployment rate in April 2006 compare to the natural unemployment rate?