Questions

1.Explain relationships between inflation and unemployment by using the Philips curve. (20 points)

2.Suppose that people expect inflation to be equal 3 percent, but in fact prices rise by 5 percent. Indicate whether this unexpected higher rate of inflation would help or hurt each of the following groups. (20 points)

a.a homeowner with a fixed-rate mortgage

b.a union worker with a fixed labor contract

c.a company that has invested some of its endowment in government bond which pay fixed rate of return.

3.Why does the Central Bank of Canada have a target for the rate of inflation?In particular, why is it important for the Central Bank to make inflation rates as predictable as possible? (20 points)

4.a. Provide a definition for the natural rate of unemployment. How is your definition related to the potential output? (20 points)

b. What are different unemployment categories that are included in the natural level of unemployment? Provide at least one example for each category.

5.Assume a hypothetical economy in which the velocity is constant at 2 and real GDP is always at a constant potential of $4,000. Suppose the money supply is $1,000 in the first year, $1,100 in the second year, $1,200 in the third year, and $1,300 in the fourth year. (20 points)

a. Using the equation of exchange, compute the price level in each year.

b. Compute the inflation rate for each year.

c. If the central bank wanted to keep inflation at 10% each year, what money supply should it have targeted in each year?