Question

1. Describe how Bank of Canada is trying to combat current situation caused by COVID-19. Discuss the pros and cons of this new policy. Please provide proper details of your each argument. (2.5+2.5=5)

A

2. explain the roles of households and firms in the factor market and the product market. Give one example each of a product market and a factor market. (2.5+2.5=5 Points)

3. Remember the concept of aggregate demand (AD) and aggregate supply (AS), what measures can a government take to promote long-term economic growth in the country? Discuss with rational. (5 Points) – NOTE: For this question ignore current situation of COVID-19.

4. Opportunity cost is an important concept in economics, keeping the same in mind, discuss why students generally prefer late morning classes to early morning classes. (5 Points)

5. Discuss the role of automatic stabilizers in current situation caused by COVID-19. What are the pros and cons of these automatic stabilizers in an economy? (2.5+2.5=5 Points)

Answer 1

In order to overcome financial imbalances of the economy, Canada’s central bank the Bank of Canada is adopting expansionary monetary policy and trying to make it effective. The primary intention of implementing this policy is to increase money supply volume in the economy so that the economy deteriorates less and the prior stability is maintained to some extent. Under the expansionary monetary policy, the Bank of Canada is using open market operation tools mainly. Recently, it adjusted its targeted overnight rate to 0.25%, the Bank Rate 0.50% and the deposit rate to 0.25%. It also announced some other measures to provide active support to the country’s financial system so that liquidity is maintained.

There are some pros and cons of the policy taken by the Bank of Canada.

Pros:

i. The policy is targeting to lower rate of interest so that credit availability enhances and investment also increases. This will increase consumption which will boost aggregate demand in the economy and real GDP will also increase. Thus the economy will expand in the process.

ii. Since this policy boost investment in businesses so the employment level will also increase and thus the unemployment problem will be gradually overcome.

Cons:

i. This policy would not be effective much as consumption and investment part are not merely dependent on the rate of interest.

ii. Another major drawback of monetary policy is that the existence of time lag. It takes some time normally few months to come into effect.