Chapter 12

Question 1

Inflation

Answer 1

Generalized rise in overall level of prices

Question 2

Key causes of inflation

Answer 2

1. Demand-Pull
2. Cost-Push
3. Built-In inflation

Question 3

Demand-Pull

Answer 3

Demand exceeding supply, high consumer spending, strong job market, BOC increase money supply and lower interest rates

Question 4

Cost-Push

Answer 4

Rising costs of production resulting in businesses raising prices, rising wages and material costs, inefficient regulation

Question 5

Built-In Inflation

Answer 5

Self sustaining

wage prices spirals: workers demand higher wage = higher prices, spiral cycle

Inflation expectations: businesses and comsumer expect it and make it a reality

Question 6

4 reasons BOC doesn’t target 0% inflation

Answer 6

1. Inflation greases wheels of labour market
2. Bank can lower real interest rates by more when inflation above 0
3. 0% inflation target runs risk of deflation
4. Measured inflation may be overstated