Economics Essay - Phillips Curve, Monetary Policy, and Trade Theory

Trade-off between Unemployment and Inflation in Short Run

You should complete it after completing your course work for Units 4, 5, and 6. Answer each question clearly and concisely.

1.The low-price fashion chain Forever 21 has reached a decision to discontinue operations in Canada. The retailer operates 44 stores in Canada and employs about 2,000 people. Using appropriate diagrams, explain the following.

(a)Is there a trade-off between the unemployment rate and the inflation rate in the short run? How can the Phillips curve be used to answer this question?

(b)Explain how the aggregate demand and aggregate supply impact the Phillips curve.

(c)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?

(d)If the Bank of Canada continues to take expansionary monetary policy, how will the unemployment rate and inflation be affected? (Use both Phillips curve and AS-AD graphs in your explanation.)

(e)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.(a) Explain the difference between monetary policy instruments and monetary policy tools.                        

(b) Describe any two key tools of monetary policy and explain how they would be used to implement expansionary monetary policy.     

3.If the Bank of Canada purchases $500 million worth of bonds from the public in an open market operation, calculate the change in quantity of money that will eventually result. Assume that the currency drain is 0.20, and that the desired reserve ratio is 0.10.                        
(a)    Define the marginal propensity to consume and explain its role in determining the size of the multiplier.            

(b)     Explain how the size of the multiplier will change when one brings in the role of imports.                      
(c)     Using the concepts in parts (a) and (b) above, calculate the slope of the AE  curve and the size of the multiplier if MPC = 0.80. Then, calculate the revised slope of the AE curve and the multiplier when you know that the marginal propensity to import is 0.15 and the marginal tax rate (induced tax rate) is 0.2.
                                      

5.The economy has seen the unemployment rate decrease from 9.5% to 6%, the inflation rate increase from 1.2% to 2.8%, and there has been a 24% rise in consumer spending and a 45% rise in investment spending in the same time period.

(a)Given the above, what would you predict about the overall direction of the economy? Explain your answer.                 

(b)Describe the fiscal policy that will already be automatically operating, as well as the appropriate discretionary fiscal policy that the government should adopt, given the above situation.                 
(c)Describe the appropriate monetary policy that the Bank of Canada should be operating, given the above situation.               

6.Describe the contrasting views of the Keynesians and the monetarists regarding an appropriate contractionary (tightening) policy to bring an economy out of a period of high inflation caused by excess aggregate demand.  

7.Suppose that Bandor (Kiribati) can produce 150 tonnes of corn or 100 tonnes of avocado. Suppose that Gwenor (Tuvalu) can produce 90 tonnes of corn or 200 tonnes of avocado.                           

(a)What is the opportunity cost of 1 unit of avocado in Bandor? Show your work.

(b)What is the opportunity cost of 1 unit of avocado in Gwenor? Show your work.

(c)Which country has a comparative advantage in producing avocado? Explain why.

(d)Suppose that trade takes place between Bandor and Gwenor. Which good will Bandor import from Gwenor? Explain why.

8.(a)     Discuss three tools government can use to protect domestic industries from foreign competition.                       

(b)     Discuss and evaluate the two classical arguments for trade protection and  restriction.                        

9.In 2016, the Canadian dollar depreciated against the US dollar. Explain the effects of this depreciation on each of the following.   
(a)Canadian exporters of goods to the US

(b)Canadian firms that buy machinery and equipment from US suppliers

(c)cross border shoppers from Canada who shop for goods in the US

Organize the above data into the appropriate categories for the current and capital accounts; determine the current account balance, the capital account balance, and the official settlements account balance.