Monetary Theory Question

Please choose 1 of the following 2 questions to answer. Please answer it as fully as possible. For the answer you can do some research from the web. But We expect you to draw more on the course materials introduced in class. Question 1: You are the governor of the bank of Canada. It is 1988 and the economy is facing very high inflation nearly 18 percent and modest gains in GDP growth. You decide to be an inflation hawk and decide to target inflation between 1 and 3 percent. In to do this you need to put a blueprint together to support you decision. What are the pros and cons of inflation and show how a permanent change towards inflation target will see the benefits exceed the costs the longer inflation is targeted. What are some of the tools you can use to achieve your goal? In keeping the economy as close to potential as possible what role does expectations play in your blueprint? How do you form expectations in the economy and what are the benefits of being a transparent and credit central banker when trying to achieve your target and secondly keeping the real economy as close to potential as possible. Do you ever think there is case where you primary mandate should change from one that has inflation targeting as the key focus or do you think this mandate should change in include output stability? Why or why not? Question 2:You are the governor of the bank of Canada. The economy is doing really well and the real economy is equal to potential. The government has been running large budget deficits in the long run however. However technological breakthroughs have been pushing the potential of the economy. The 5G network has become more widespread and this has improved the capacity and efficiency of the economy in both the short and long run. We thus anticipate a shift in both the short and long run supply curves in the economy. In the background housing prices have been increasing and the private sector is facing higher interest rates given the huge budget deficits. Many people are looking to the bank of Canada to conduct policy to get the economy to the new optimum while tackling some of the more pressing issues such as high housing pricing and the impacts of higher general interest rates in the economy. Please put a plan together addressing these issues. How would you conduct your policy to achieve your goals while staying in your mandate of keeping inflation between 1 and 3 percent? Requirements: no words limited | .doc file