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.

(10 marks)

(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?