Answer to Question #45409 in Macroeconomics for Bob

Question

The economy has seen the unemployment rate decrease from 8.56 percent to 6.15 percent, the inflation rate increase from 1.4 percent to 3.2 percent, and there has been a 17 percent increase in consumer spending and a 22.5 percent increase 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 by referring to each of the indicators cited.

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.

Answer 1

The economy has seen the unemployment rate decrease from 8.56 percent to 6.15 percent, the inflation rate increase from 1.4 percent to 3.2 percent, and there has been a 17 percent increase in consumer spending and a 22.5 percent increase in investment spending in the same time period.
a. The overall direction of the economy is positive, there is a development and the rise of each indicator. And only inflation increases, which is not very good.
b. Expansionary fiscal policy is already automatically operating, so the contractionary discretionary fiscal policy should be adopted given the above situation to decrease the spending activity rates. So, the government may increase taxes
c. The government should implement also contractionary monetary policy to decrease the inflation rate through the increase of the interest rates.