Answer to Question #47709 in Macroeconomics for Aditi

Question

5. 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

Unemployment rate decrease from 8.56 percent to 6.15 percent,
inflation rate increase from 1.4 percent to 3.2 percent,
17 percent increase in consumer spending
22.5 percent increase in investment spending.
a. The overall direction of the economy is positive, it is a period of economic growth. As consumer and investment spending increase and unemployment decreases, the real production and GDP increases too.
b. The fiscal policy that will already be automatically operating is taxation. The appropriate discretionary fiscal policy to be adopted is contractionary fiscal policy or decrease of government spending to "cool" the economy.
c. Contrectionary monetary policy is appropriate in this case, so the Bank of Canada should increase the interest rate to decrease inflation and business activity in the economy.