Economics : Canada In The Global Environment 7th Edition King, Harvey B.; Cohen, Avi J. - Solutions

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16. Study Reading Between the Lines on pp. 750–751 and then answer the following questions.a. Given the policy action taken by the Bank of Canada, how do you think the Bank’s expectation about future real GDP growth and future inflation differ from the most recent actual real GDP growth rate
15. Carney: Bank of Canada’s Focus on Inflation Key Amid Commodities Boom Keeping inflation in check is vital. ... Bank of Canada governor Mark Carney said Thursday, as he sought to explain the rationale behind last week’s controversial decision to keep interest rates steady ... at three
14. Canada Inflation Slows, Central Bank Expected to Cut Rates Again Inflation slowed dramatically. ... Canada’s Consumer Price Index (CPI) increased by 1.8% in the 12-month period from February 2007 to February 2008, the slowest rate of growth in six months ... It’s also a dramatic turn from
13. Policy and Infrastructure Developments Recent disruptions in financial markets have led central banks around the world to re-examine their roles in providing “liquidity” to the financial system. ... Central banks should provide liquidity to financial markets in extraordinary circumstances
12. Suppose that in Freezone, shown in problem 11, the short-run aggregate supply curve is SASB and potential GDP increases to $350 billion.a. What happens if the central bank lowers the overnight rate and buys securities on the open market?b. What happens if the central bank raises the overnight
11. The figure shows the economy of Freezone. The aggregate demand curve is AD and the short-run aggregate supply curve is SASA. Potential GDP is$300 billion.a. What are the price level and real GDP?b. Does Freezone have an unemployment problem or an inflation problem? Why?c. What do you predict
10. Suppose that the Reserve Bank of New Zealand is following the Taylor rule. In 2009, it sets the official cash rate (the N.Z. equivalent of the overnight rate) at 4 percent a year. If the inflation rate in New Zealand is 2.0 percent a year, what is its output gap?
9 Suppose the Bank of Canada is required to keep the inflation rate between 0 and 3 percent a year and is also required to keep trend inflation at the midpoint of the range. The Bank of Canada achieves its target.a. If initially the price level is 100, what is the likely price level after 10
8. Canada Moves to Restrict Bank Share Buybacks Canada has barred its domestic banks and insurers from buying back their own shares at a time when their priority is to strengthen their balance sheets. ... Governments worldwide have committed more than $1,000bn of state funds to support the
7. Global Bazookas, But No Silver Bullet Central bankers unleashed a broadside at the financial markets Wednesday. ... The [U.S.]Federal Reserve and five other central banks cut their interest rates, saying the crisis that has hammered stocks and locked up credit markets has also raised the risk of
6. Bank of Canada Lowers Overnight Rate Target The Bank of Canada today announced that it is lowering its target for the overnight rate by onequarter of a percentage point to 2 1/4 percent.The operating band for the overnight rate is correspondingly lowered. ... The outlook for growth and inflation
5. Suppose that in Freezone, shown in problem 4, the short-run aggregate supply curve is SASA and a drought decreases potential GDP to $250 billion.a. What happens in Freezone if the central bank lowers the overnight rate and buys securities on the open market?b. What happens in Freezone if the
4. In Freezone, shown in the figure, the aggregate demand curve is AD, potential GDP is $300 billion, and the short-run aggregate supply curve is SASB.a. What are the price level and real GDP?b. Does Freezone have an unemployment problem or an inflation problem? Why?c. What will happen in Freezone
3. Suppose that the Bank of Canada is following the McCallum rule. The Bank of Canada has an inflation target range of between 1 percent a year and 3 percent a year. The long-term real GDP growth rate in Canada is 2.4 percent a year. If the velocity of circulation of the monetary base is 2, what is
2. Suppose that the Bank of England decides to follow the Taylor rule. In 2005, the United Kingdom has an inflation rate of 2.1 percent a year and its output gap is –0.3 percent. At what level does the Bank of England set the repo rate(the U.K. equivalent of the overnight rate)?
1. Suppose that the Bank of Canada is required to keep the inflation rate between 1 percent and 2 percent a year but with no requirement to keep trend inflation at the midpoint of this range. The Bank of Canada achieves its target.a. If initially the price level is 100, i. Calculate the highest
2 Briefly, why does the Bank of Canada reject each of these alternatives?
1 What are the alternative strategies for conducting monetary policy?
5 How do the Bank’s actions influence the inflation rate and how long does it take for inflation to respond to the Bank’s policy changes?
4 How do the Bank’s actions influence real GDP and how long does it take for real GDP to respond to the Bank’s policy changes?
3 How do the Bank’s actions change the exchange rate?
2 Do interest rates fluctuate in response to the Bank of Canada’s actions?
1 Describe the channels by which monetary policy ripples through the economy and explain why each channel operates.
5 How is the overnight rate determined in the market for reserves?
4 What happens when the Bank of Canada buys or sells securities in the open market?
3 What is the operating band? What does it do?
2 Summarize the Bank of Canada’s monetary policy decision-making process.
1 What is the Bank of Canada’s monetary policy instrument?
4 What is the Bank of Canada’s record in achieving its inflation-control target?
3 How does the core inflation rate differ from the overall CPI inflation rate?
2 What are the two parts of the inflation-control target?
1 What is the Bank of Canada’s objective of monetary policy?
■ Explain and compare alternative monetary policy strategies
■ Explain the transmission channels through which the Bank of Canada influences the inflation rate
■ Explain how the Bank of Canada makes its interest rate decision and achieves its interest rate target
■ Describe Canada’s monetary policy objective and the framework for setting and achieving it
18. Study Reading Between the Lines on pp. 724–725.a. Describe the fiscal policy proposed by the G-20 finance ministers.b. Explain the effects of the proposed fiscal policy if it is implemented well.c. Explain Prime Minister Stephen Harper’s concerns about overstimulating the global and
17. Conservative Canada Taking Fiscal Stimulus Slowly Canada says it will play its part in a global effort to stimulate the world economy, but Finance Minister Jim Flaherty said on Saturday he still did not foresee running a budget deficit in the current fiscal year. Flaherty said he would include
16. Bracing for Downturn Sixteen years of almost uninterrupted job growth has produced an embarrassment of riches in Canada’s Employment Insurance account—a surplus, in fact, of $54 billion at current reckoning.But with economic storm clouds gathering south of the border, the Conservative
15. The Canadian Debt-Strategy Model In its role as fiscal agent to the government, the Bank of Canada provides analysis and advice on decisions about the government’s domestic debt portfolio. Debt-management decisions depend on assumptions about future interest rates, macroeconomic outcomes, and
14. Clueless Economists Find the Answer“A month ago, when we would normally have released ... an updated Canadian outlook, the economic landscape was in major disarray, and we instead put out a memo titled We Don’t Have a Clue and We’re Not Going to Pretend That We Do,” economists at the
13. The economy is in a boom, the inflationary gap is large, and there is a budget deficit.a. Do we know whether the budget deficit is structural or cyclical? Explain your answer.b. Do we know whether automatic stabilizers are increasing or decreasing aggregate demand?Explain your answer.c. If a
12. The economy is in a boom and the inflationary gap is large.a. Describe the discretionary and automatic fiscal policy actions that might occur.b. Describe a discretionary fiscal restraint package that could be used that would not produce serious negative supply-side effects.c. Explain the risks
11. Suppose that capital income taxes are based (as they are in Canada and most countries) on nominal interest rates. And suppose that the inflation rate increases by 5 percent. Use appropriate diagrams to explain and illustrate the effect that this change would have ona. The tax rate on capital
10. Suppose that in Canada, investment is $160 billion, saving is $140 billion, government expenditure on goods and services is $150 billion, exports are $200 billion, and imports are $250 billion.a. What is the amount of tax revenue?b. What is the government budget balance?c. Is the government
9. Canada Will Try to Avoid Deficit: Harper Prime Minister Stephen Harper said ... “The Minister of Finance has been looking at a series of careful measures to try and preserve Canada’s balanced budget position. ... But if there’s a world-wide agreement we will engage in sufficient stimulus
8. Canada May Offer New Economic Stimulus Finance Minister Jim Flaherty is suggesting the federal government may be willing to provide additional economic stimulus to inject life into Canada’s dormant economy—and he’s urging the provinces to consider following suit. ... “To the extent that
7. Raise Corporate Taxes in Canada, Labour Group Argues Despite some reductions, corporate tax rates in Canada are still the 11th highest of about 80 developed and developing economies. ...“Canada’s corporate income tax rate is on the wrong side of the Laffer curve,” a C.D. Howe report said.
6. Strengthening Canada’s Tax Advantage The Government ... announc[ed] $60 billion in tax reductions for individuals, families, and businesses over this and the next five fiscal years.Combined with previous tax relief introduced by the Government, total tax relief over the same period approaches
5. The economy is in a recession, the recessionary gap is large, and there is a budget deficit.a. Do we know whether the budget deficit is structural or cyclical? Explain your answer.b. Do we know whether automatic stabilizers are increasing or decreasing aggregate demand?Explain your answer.c. If
4. The economy is in a recession, and the recessionary gap is large.a. Describe the discretionary and automatic fiscal policy actions that might occur.b. Describe a discretionary fiscal stimulation package that could be used that would not bring a budget deficit.c. Explain the risks of
3. Suppose that instead of taxing nominal capital income, the government changed the tax code so that the inflation rate is subtracted from the interest rate before the taxable income from capital is calculated. Explain and illustrate the effect that this change would have ona. The tax rate on
2. Suppose that in China, investment is $400 billion, saving is $400 billion, tax revenues are$500 billion, exports are $300 billion, and imports are $200 billion.a. Calculate government expenditure.b. What is the government budget balance?c. Is the government exerting a positive or negative impact
1. The government is proposing to raise the tax rate on labour income. Use appropriate diagrams to show the directions of change, not exact magnitudes, of the supply-side effects of such a policy.a. What will happen to the supply of labour and the demand for labour and why?b. How will the
5 How do we tell whether a budget deficit needs government action to remove it?
4 How do induced taxes and transfer payments work as automatic stabilizers to dampen the business cycle?
3 Why does a balanced budget increase in spending and taxes increase aggregate demand?
2 Why is the government expenditure multiplier larger than the autonomous tax multiplier?
1 How can the federal government use fiscal policy to stabilize the business cycle?
4 What is the Laffer curve and why is it unlikely that Canada is on the “wrong” side of it?
3 Why are income taxes on capital income more powerful than those on labour income?
2 How does the tax wedge influence potential GDP?
1 How does a tax on labour income influence the equilibrium quantity of employment?
3 Explain the connection between a government budget deficit and a government debt.
2 Under what circumstances does the government have a budget surplus?
1 What are the main items of government revenues and outlays?
■ Explain how fiscal policy is used to stabilize the business cycle
■ Explain the supply-side effects of fiscal policy
■ Describe how federal and provincial budgets are created and describe their recent history
17. Study the account of the Canadian and U.S.labour markets in Reading Between the Lines on pp.696–697, then answer the following questions.a. What are the main features of the labour force participation rate in Canada and the United States since 2000?b. What are the main features of the
16. Real Wages Fail to Match a Rise in Productivity For most of the last century, wages and productivity—the key measure of the economy’s efficiency—have risen together, increasing rapidly through the 1950s and 60s and far more slowly in the 1970s and 80s. But in recent years, the
15. Stagflation Is Back. Here’s How to Beat It Three decades ago, in a bleak stretch of the 1970s, an economic phenomenon emerged that was as ugly as its name: stagflation. ... It created an existential crisis for the global economy, leading many to argue that the world had reached its limits of
14. Economy Facing Dual Threat—Slow Growth, High Inflation, says Bank of Canada“I am not using the word stagflation,” said Global Insight managing director Dale Orr. “But it’s a very awkward trend when you have weak output and yet you have high inflation.” He said traditionally the term
13. Report Says Canadian Recession Is Here Canadians are in store for a harsh winter of economic news with substantial job losses mounting in the next few months as recessionary times take hold, the Global Insight forecasting firm says.Managing director Dale Orr ... believes Canada has already
12. Suppose that the business cycle in Canada is best described by RBC theory. An advance in technology increases productivity.a. Draw a diagram to show the effect of the advance in technology in the market for loanable funds.b. Draw a diagram to show the effect of the advance in technology in the
11. An economy has an unemployment rate of 4 percent and an inflation rate of 5 percent a year at point A in the figure.Some events occur that move the economy in a clockwise loop from A to B to D to C and back to A.a. Describe the events that could create this sequence.b. Draw in the figure the
10. The Reserve Bank of New Zealand signed an agreement with the New Zealand government in which the Bank agreed to maintain inflation inside a low target range. Failure to achieve the target would result in the governor of the Bank of Canada losing his job.a. Explain how this arrangement might
9. Economy on Verge of Recession, Central Bank Warns The Canadian economy will be on the verge of recession until the spring, the Bank of Canada warned Thursday, slashing its forecast for growth to an anemic 0.6 percent this year and again next year, the weakest performance since the previous
8. Energy Power Inflation to 3.5%Canada’s inflation rate last month was the highest in more than five years ... but economists say they’re not overly concerned because the pace of increases appears to be slowing. Statistics Canada’s consumer price index ... rose 3.5 percent between August
7. Recession? Maybe. Depression? Get Real.The [U.S.] unemployment rate skyrocketed during the Depression, peaking at nearly 25 percent in 1933. The current [U.S.] unemployment rate is just 5 percent. And that’s only up from 4.5 percent a year ago. Contrast that with the “far more explosive
6. The Right Way to Beat Chinese Inflation High inflation is threatening social stability in China, soaring from 3.3 percent in March 2007 to 8.3 percent in March 2008. ... China’s accelerating inflation reflects a similar climb in its GDP growth rate, from the already high 11 percent in 2006 to
5. Suppose that people expect deflation (a falling price level), but aggregate demand remains at AD0.a. What happens to the short-run and long-run aggregate supply curves? (Draw some new curves if you need to.)b. Describe the initial effects of an expected deflation.c. Describe what happens as it
4. Some events occur and the economy is expected to experience inflation.a. List the events that might cause an expected inflation.b. Describe the initial effects of an expected inflation.c. Describe what happens as an expected inflation proceeds.
3. Some events occur and the economy experiences a cost-push inflation.a. List the events that might cause a cost-push inflation.b. Describe the initial effects of a cost-push inflation.c. Describe what happens as a cost-push inflation spiral proceeds.
2. Some events occur and the economy experiences a demand-pull inflation.a. List the events that might cause a demandpull inflation.b. Describe the initial effects of a demand-pull inflation.c. Describe what happens as a demand-pull inflation spiral proceeds.
1. The spreadsheet provides information about the economy in Argentina. Column A is the year, Column B is real GDP in billions of 2000 pesos, and Column C is the price level.a. In which years did Argentina experience inflation?In which years did it experience deflation (a falling price level)?b. In
5 What are the main criticisms of RBC theory and how do its supporters defend it?
4 According to RBC theory, how does a fall in productivity growth influence investment demand, the market for loanable funds, the real interest rate, the demand for labour, the supply of labour, employment, and the real wage rate?
3 What, according to RBC theory, is the source of the business cycle?
2 What are the four versions of the mainstream theory and how do they differ?
1 Explain the mainstream theory of the business cycle.
4 Does Canada have a stable short-run Phillips curve? Explain why or why not.
3 If the natural unemployment rate increases, what happens to the short-run Phillips curve and the long-run Phillips curve?
2 If the expected inflation rate increases by 10 percentage points, how do the short-run Phillips curve and the long-run Phillips curve change?
1 How would you use the Phillips curve to illustrate an unexpected change in inflation?
7 How do real GDP and the price level change if the forecast of inflation is incorrect?
6 How does expected inflation occur?
5 What is stagflation and why does cost-push inflation cause stagflation?
4 What must happen to create a cost-push inflation spiral?
3 How does cost-push inflation begin?

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Economics : Canada In The Global Environment 7th Edition King, Harvey B.; Cohen, Avi J. - Solutions

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