Trade-off between unemployment rate and inflation rate

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Reference no: EM133184298

1. In April 2020, the Canadian economy lost about 2 million jobs amid the Covid-19 crisis. According to Statistics Canada, the unemployment rate soared to 13%, up from the 7.8% recorded in March of 2020. Around the same period, inflation rate dropped from 2.2% in February to 0.9% in March and -0.2% in April. Use appropriate graph(s) to explain the following.

a) Was there a trade-off between the unemployment rate and the inflation rate between the months of March and April 2020? How can the Phillips curve be used to answer this question?

b) If the unemployment rate and inflation are both rising, can this be explained by a movement along a given Phillips curve? What must be happening to aggregate demand and aggregate supply? What must be happening to the Phillips curve?

c) If the Bank of Canada continues to undertake expansionary monetary policy, how will the unemployment rate and inflation be affected? (Use both Phillips curve and aggregate supply - aggregate demand graphs in your explanation.)

d) Is there a trade-off between the unemployment rate and inflation in the long run? How is the long run aggregate supply curve related to the long run Phillips curve?

2. Suppose that there is a wave of pessimism in the economy due to Covid-19 and, as a result, the economy is operating below its natural level of output with high unemployment and low inflation.So, the central bank decides to stimulate the economy. Assume a small open economy with perfect capital mobility and a flexible exchange rate system.

a) (i) Should the central bank increase or decrease the money supply if it wants to stimulate the economy? Explain.

(ii) List two monetary policy tools that the central bank uses to influence the money supply and explain how each tool should be applied to be consistent with your response in (i).

b) Which macroeconomic variables change immediately and in what direction?

c) Which macroeconomic variables change over the short run and in what direction?

d) What happens to employment and inflation? Does the rate of economic growth increase?

3. Consider a small open economy with perfect capital mobility and a flexible exchange rate. Suppose that net capital outflow (NCO) is negative at the world interest rate. Use a two-panel diagram to explainthe following.

a) What is the is the effect of an increase in world interest rate on(i) national saving, (ii) domestic investment, (iii) NCO, (iv) the real exchange rate, and (v) net exports?

b) What is the is the effect of an increase in the government budget surplus on (i) national saving, (ii) domestic investment, (iii) NCO, (iv) the real exchange rate, and (v) net exports?

c) What is the is the effect of an increase in the government budget deficit on (i) national saving, (ii) domestic investment, (iii) NCO, (iv) the real exchange rate, and (v) net exports?

d) What is the is the effect of imposing an import quota on (i) national saving, (ii) domestic investment, (iii) NCO, (iv) the real exchange rate, and (v) net exports?

4. Use appropriate graph(s)to explain the effect of each of the following events, if any, on the position of the short- and long-run aggregate supply curves and the aggregate demand curve for a small open economy.

a) The country becomes home to thousands of immigrants who significantly increase its labour force.

b) The Central Organization of Trade Unions in the country wins a 10 percent increase in money wage rates for low-income workers.

c) There is a decrease in the income of the country's major trading partners.

d) The country starts to harness geothermal energy, which it puts to use and sells the excess energy to neighbouring states.

5. The economy has seen the unemployment rate increase from 5.7% to 9.5% due to the Covid-19 crisis. During the same period, the rate of inflation declined from 1.9% to 0.7%, and the government had a budget deficit. The government wants to use fiscal policy to spur rapid growth of real GDP. It is weighing whether to spend more on infrastructure programs or to cut income taxes.

a) Explain and use appropriate graph(s) to show the short- and long-run effects of new infrastructure expenditure.

b) Explain and use appropriate graph(s) to show how a cut in income taxes would change macroeconomic variables in the shortrun and longrun.

c) Of the two fiscal policies, which one would increase the rate of economic growth? Explain.

d) Explain the risks of the two fiscal policies. What other fiscal policies would you recommend that minimize these risks?

Reference no: EM133184298

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