Question

Suppose the governor of the Bank of Canada accepts the theory of the short-run Phillips curve and the natural-rate hypothesis and wants to keep unemployment close to its natural rate. Unfortunately, because the natural rate of unemployment can change over time, the governor is unsure about the value of the natural rate. Which of the following macroeconomic variables do you think the governor should look at when conducting monetary policy? Check all that apply.

Components of GDP

Interest rates

Oil prices

Inflation rate

Minimum wage

Answer 1

When the Governor has to conduct the monetary policy, in taking a decision whether to have an expansionary or contractionary monetary policy, the Governor needs to assess the current state of the economy. This can be assessed using the level of aggregate demand in the economy and thus looking at the components of GDP. In the money market, the current prevailing level of rate of interest should also be looked at by the government when conducting monetary policy. Since the goal of the Central bank is to maintain price stability, thus current level of inflation rate in the economy also needs to be considered while deciding the conduct of monetary policy.

Thus, the Governor should look at components of GDP, Interest rates and inflation rate while conducting monetary policy.