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PSLecture17 - Problem Set for Lecture 17 Monetary Policy...

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Problem Set for Lecture 17: Monetary Policy and the Role of the Bank of Canada [with models ] [February 9, 2010] Note: Those problems identified with a T are considered for review in the tutorials. T17.1 “Walter knows best. Walter argues that the most important economic goals for an industrial country like Canada include price stability [Bank of Canada’s definition] and improved labour productivity. Walter suggests that full employment may be helpful but it should not be a priority.” [Note: Remember what Krugman stated about reducing the rate of unemployment and increases in the standard of living]. T17.2 “According to Walsh, the economic costs of inflation are greatly overstated. Inflation does not really matter. Walsh argues that we should have full employment and higher productivity. Walsh takes the position that central banks have spent too much energy controlling prices and not enough supporting full employment.” T17.3 “Ward reviews the AD/SRAS model. Ward does not understand why the AD curve is downward sloping.” Your task: help Ward with the three explanations. T17.4 “Wayne has been working with the AD/SRAS model. Wayne has examined the possible shocks that could arise from monetary policy, discretionary fiscal policy, increases/decreases in the average unit cost of production and productivity changes. Sean, Wayne’s studying companion, indicates that one particular type of shock would cause the price level to rise and, at the same time, real GDP to fall. Wayne answers: I know, I know – an “easy” monetary policy would be the answer.” T17.5
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