Question

1. Inflation (show all work)

Name the two measurements of inflation discussed in class

               1)

               2)

Using 2012 as the base year (=100) calculate the inflation rate for 2013

Year	Slices of Pizza	Price per Slice	Cans of Pepsi	Price per Can
2012	40	10	10	20
2013	60	12	20	24

What does currency depreciation mean?

Who is the only legal issuer of bank notes and coins in Canada?

A responsible government believes that the inflation rate is out of control, what fiscal policies could they enact?

Answer 1

1.The GDP deflator is a measure of price inflation. It is calculated by dividing Nominal GDP by Real GDP and then multiplying by 100.

Nominal GDP in 2013= 60x12 + 20x24 = $1200

Real GDP in 2013 (using 2012 prices)= 40x12 + 10x24 = 720

GDP deflator= 1200/720 x 100 = 166%.

2. Currency depreciation is a fall in the value of a currency in a floating exchange rate system. Currency depreciation can occur due to factors such as economic fundamentals, interest rate differentials, political instability or risk aversion among investors.

3. In accordance with the Bank of Canada Act, the Bank of Canada has the sole authority to issue bank notes for circulation in Canada

4. The two main components of fiscal policy are government revenue and government expenditure. In fiscal policy, the government controls inflation either by reducing private spending or by decreasing government expenditure, or by using both. It reduces private spending by increasing taxes on private businesses.