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Briefly explain the tools that governments have to move the economy from either a recessionary or expansionary gap to the long run equilibrium level

Question 1:  Overview of the Macroeconomy: Interpretation  (25 marks)

Please discuss the current state of the macroeconomy in Canada.  In particular please discuss the growth rates and gross domestic product, the unemployment rate and lastly inflation.  Please discuss how these variables compare to both the short and long run averages.

In providing answers, please provide where data was obtained.  You can use the internet or more authorative sources such as the Bank of Canada, Statistical Canada (Cansim) dataset or the IMF/World Bank websites.  After you have ascertained this information,

please make a determination as to whether the economy is at its long run equilibrium level (full employment), or whether it is in a recessionary or expansionary gap.  (Hint: the economy is rarely at its long run level).

(GDP is themonetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. GDP = C + G + I + NX where: ” C ” is equal to all private consumption, or consumer spending, in a nation’s economy” G ” is the sum of government spending” I ” is the sum of all the country’s businesses spending on capital” NX ” is the nation’s total net exports, calculated as total exports minus total imports. (NX = Exports – Imports) Unemployment occurs when a person who is actively searching for employment is unable to find work. Unemployment is often used as a measure of the health of the economy. The most frequently cited measure of unemployment is the unemployment rate. This is the number of unemployed persons divided by the number of people in the labor force)

Question 2: Legislative Overview (15 Marks)

Please discuss 2 important institutions in Canada responsible for conducting fiscal and monetary policy, name the Department of Finance and the Bank of Canada.  What are the roles of each and what are each responsible for obtaining?  What are the responsibilities of each institution and what tools do they have at their disposable to impact the economy?  Can you say that their objections are in tandem with one another or due they sometimes conflict?  Please explain.

 

Question 3: Mechanical Aspects of Conducting Fiscal and Monetary Policy (25 Marks)

Briefly explain the tools that governments have to move the economy from either a recessionary or expansionary gap to the long run equilibrium level.  Based on your diagnosis (from question 1) what are some of the fiscal or monetary policy tools available to government and the Bank of Canada can undertake to get the economy back to full employment.  Please use diagrams to illustrate your answer.  What are the pros and cons of fiscal and monetary policy?

Based on your analysis, does conducting fiscal and monetary policy result in the same impacts on inflation or output levels?  Be sure to talk about the tradeoffs (or lack thereof) that exists between inflation and output in the short and long run.

 

Question 4: Policy (45 marks)

In many instances, government spending results in the economy moving to the long run steady state at the expense of higher inflation levels.

All too often, the best policy is simply to do nothing, leaving the market to adjust in order get the economy back to the long run steady state level (full employment) at the lowest price level.

The problem with government doing nothing is two fold.  First they do not want to be seen as not acting, especially during a recession.  Secondly, the economic benefits of the government doing nothing (such as during a recessionary period) takes a long time to materialize (given prices in the economy take time to adjust), which is not popular with governments especially if there is an election.  There seems to therefore be a tension between the Bank of Canada who wants to achieve price stability first and output stability second, versus the Department of Finance who is more concerned with output stability and employment creation.  Class, please outline the costs and benefits of achieving price stability relative to output stability (In your answer be sure to discuss the fact that there is no trade-off between inflation and unemployment in the long run).  Be sure to discuss the costs of inflation, the costs and benefits of reducing it and how this compares to reducing unemployment if at all possible.  Can a case be made for targeting zero inflation as the primary objective, especially in the long run?  If so, what things can governments do to tackle unemployment, especially structural?

 


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