Overview of the Macroeconomy: Interpretation (25 marks) Please discuss the curre

Question

Overview of the Macroeconomy: Interpretation (25 marks)

Please discuss the current state of the macroeconomy in Canada. In particular please discuss the growth rates and gross domestic product, the unemployment rate and lastly inflation. Please discuss how these variables compare to both the short and long run averages. In providing answers, please provide where data was obtained. You can use the internet or more authorative sources such as the Bank of Canada, Statistical Canada (Cansim) dataset or the IMF/World Bank websites. After you have ascertained this information, please make a determination as to whether the economy is at its long run equilibrium level (full employment), or whether it is in a recessionary or expansionary gap. (Hint: the economy is rarely at its long run level).

Explanation / Answer

The Canadian government is pursuing an expansionary fiscal policy. Looking at the GDP components, the output level is ascertained by -

Y= C+I+G+NX

The household wealth gain and the business investment, mainly are likely to boost this growth. The government has also increased its spending. Hence the GDP is likely to increase as stabilise by next year as the effect will slowly lag and stabilize as well. This, thus is also an indicator of an increase in the net growth rate of the economy.

A monetary stimulus that has been injected in the current financial year will lead to an increase in the inflation rate to at least 2%. The economy is also likley to hit the full employment level again due to the fiscal expansion. This means that the economy will return to natural level of unemployment.

Thus, all the above tend to indicate higher than average short run averages. With a slow easing out of the monetary policy in the next financial year and as the effects of fiscal expansion taper off next year, the economy is however likely to return to lower than short run averages. However, this boost will permanently increase the long run average.

As mentioned above, the economy is currently at its expansionary gap and by 2018, the full employment level will be retained, given a tightening in the moentary policy and stabilization of the fiscal growth.

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