atharvsingh0802

atharvsingh0802

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atharvsingh0802

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This question is related to the article " Inflation, recession and the perils of overtightening ", The Globe and Mail, November 14, 2022.

 

Source: Parkinson, D. (2022). Inflation, recession and the perils of overtightening: The office of the parliamentary budget officer decided to crunch the numbers to estimate what would happen if the bank of canada overstepped with its rate increases. surprisingly, it might not make much difference in wiping out inflation any faster.

 

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Note:

  • Use your own words; DO NOT PLAGIARIZE from the article.
  • Type and print your answer (i.e., hand-written answer will NOT be accepted).
  • Use full sentences (not point forms and abbreviation) to answer this question.

Failure to do one of the above might result in a grade of ZERO for the whole question.

 

  1. In attempt to tame inflation, the Bank of Canada (BOC) has raised interest rate seven times in 2022 (as of December 7, 2022, the overnight is 4.25%). In theory, an increase in interest rate can help to lower inflation rate or to slowdown the increase in inflation rate.  Explain the effect of an increase in interest rate in the foreign exchange market and how the subsequent change in exchange rate can help to tame inflation.  (5 points)
  2. The article mentioned that the Office of the Parliamentary Budget Officer (PBO) tried to estimate what would happen to the Canadian economy if the BOC ran an overtightening monetary policy.
  • What does overtightening monetary policy mean? (3 points)
  • According to the PBO, what are the potential effects of an overtightening monetary policy on the Canadian economy? (7 points)
  1. In the latter part of the article, it mentioned that the unexpected and unpleasant finding by the PBO was the interest rate hikes by the BOC would not have major impact on the country’s inflation rate since recent economic developments might offset the attempts by the BOC’s disinflationary attempt. Identify those factors and explain how they might reduce the effectiveness of the BOC’s effort to lower inflation rate.  (10 points)
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