Growth Concern
Despite higher-than-forecast inflation, Bank of
Canada Governor Mark Carney said he may
keep interest rates low beyond when full output
is restored as the domestic recovery is hobbled
by a weak economy in the United States, the
nation’s biggest trade partner. “Given current
material headwinds, the policy rate can return
to its long-run level after inflation is projected
to reach the 2 percent target and output is projected to reach its potential,” Carney said.
Source: Bloomberg , September 21, 2011
a. Is Mark Carney predicting that the Canadian
economy is being pushed along a short-run
Phillips curve or that the short-run Phillips
curve is shifting? In which direction is the
economy moving and how will Carney’s plan
counter it?
b. Sketch an example of the Phillips curve
and show on the graph how the economy is
changing.