Use the following information to work Problems 1 to 5.

The Bank of Canada and the Government of Canada have agreed that the Bank will achieve an inflation rate target.

1.Explain how inflation targeting promotes full employment in the long run.

2.Explain the conflict between inflation targeting and unemployment targeting in the short run.

3.Based on the performance of Canadian inflation and unemployment, has the Bank's inflation targeting been successful?

4.Suppose Parliament legislated interest rate changes. How would you expect the policy choices to change?

5.Which arrangement, inflation targeting or unemployment targeting, would most likely provide price stability would most likely provide price stability?