ASSIGNMENT 2: THE ROLE OF GOVERNMENT IN THE ECONOMY (15%)

“As Canada's government spends, central bank bears burden of taming inflation”

Question 1. According to the article, what is driving the current inflation crisis in Canada? 75-100words. (/4)

Answer: According to the article, the main component that escalates the ongoing inflation crisis in the country
is the federal government's fiscal policies and wild spending, despite constantly rising interest rates by the
Central Bank. During and after the pandemic, the government channelized every way possible to curb
unemployment by giving bailout and relief packages to put more money in the pocket of its citizens to
stabilize the demand and supply curve, which later turns into a crisis for the country in the form of inflation as
the biggest economical challenge.

Question 2. According to the article, what is the relationship between the federal government’s fiscal
spending in 2020 and inflation? What is the relationship between the Bank of Canada’s monetary policy
(interest rate) and inflation? 100-200words. (/6)

Answer: In the year 2020, the federal government focused to make only a small contribution by spending on
COVID-19 support programs, which later leads to a run-up in inflation. Simultaneously, the slashing of interest
rates and planning to buy bonds from the central bank deeply affected consumer prices. Both the federal
government and the central bank wanted to help to make up for a shortfall in demand but as the economy is
now getting back on track and people are spending more which escorts the demand curve way over than the
supply.

The government, before COVID, tried to regulate its spending, but once the pandemic hits the country, no
option was there rather funnelling more money to struggling individuals and businesses by increasing the
fiscal policy budgets. This policy of the government was to increase the purchasing power of the citizens and
remove the hurdles of business survival, and cure unemployment.

In the same way, the central bank during Covid-19 made loans cheaper by bringing down the interest rates
overnight and buying bonds, to encourage borrowers to borrow more and spend some extra to rotate the
economy wheel. But in the middle of 2021, the central bank realized the excess borrowings due to cheaper
loans turned out as pain, and the inflation is now turning uncontrollable due to fiscal spending. To manage
inflation, the bank of Canada reviewed the rates and increasing them since then.

Question 3. Drawing from the article and what we learned in the Week 5 Lecture about government
intervention in the economy, how does the Canadian government's response to Covid-19 differ from their
response to the Great Depression? 100-200 words. (/6)

Answer: The Great Depression and Covid-19 both left a big mark on the economic graphs, thousands of people
lost their jobs, businesses collapsed, people were getting homeless and the pressure comes on the shoulders
of the federal government and the central bank to review the economy and combat with the economic fallout
of widespread shutdown. The Great Depression was totally related to financial problems such as stock market
crashes, overdemands, the decline in production, layoffs etc., whereas during the greats, depression
government invested more time in the revival of business by imposing lesser taxes, giving more incentives,
ASSIGNMENT 2: THE ROLE OF GOVERNMENT IN THE ECONOMY (15%)
“As Canada's government spends, central bank bears burden of taming inflation”
promoting export, liberalizing licensing and compliances, and deregulation. On the other hand, to tackle the
COVID-19 war-like situation, the government intervene by diverting spending and taking tax measures such
as:

1. The main focus of the federal government and the most expensive challenge was to strengthen the
Health Infrastructure to save lives, control the virus and provide on-time treatments. The Health
System to support mass testing, research and development of Covid vaccine, increasing medical
supplies, mitigation efforts and extending support to indigenous communities.
2. The second task for the government was to support its citizen and economy at the same time by
providing them monetary benefits such as Aid to individuals and businesses in the form of relief
packages by giving wage subsidies, and payments to sick workers without sick leaves to stop vide
spread of covid, allowing them to access employment insurance, providing child care benefits and
increase in current GST Tax credits, and introducing new indigenous community support funds.
3. The government supports liquidity in the economy through tax deferrals. Extending the timelines to
pay taxes, filing of returns, instalments moratorium etc. This may not be the first priority of the
government but it created a huge difference in the survival of business in the longer run.

Question 4. In the Week 4 Lecture, we learned about the relationship between supply and demand. According
to the lecture and the article, how did the Canadian government’s fiscal spending during the pandemic affect
supply and demand? 100-200 words. (/6)

Answer: To address the health and economic repercussion of the COVID-19 pandemic, the federal government
spent the most on fiscal support programs. The huge fiscal support contributed to spiking demand for
consumption goods during the pandemic, but industrial production did not adjust quickly enough to meet the
sharp increase in demand. This imbalance between supply and demand across countries led to high inflation.
Supply Chain issues and the persistence of the pandemic are the two major factors after the government’s
huge spending, which triggered the inflation to this high. Collectivism over individualism, played a vital role in
fiscal policies to determine the actual needs while distributing the economy’s financial resources to curb the
depression from happening. Prioritizing health contributions over immigration programs or increasing
domestic production to curb mass layoffs are some examples of the government’s bold decision.

Before covid-19 industries were doing really well, and the unemployment rate was at its lowest, then during
and post covid-19, the shortage of workforce, becomes the reason for the slow economic revival. The bank of
Canada slashed its interest rates, to allow businesses to borrow more for their working capital. The Incentives
and subsidies given by Canada's government reached the new highest, and the supply over demand started
dominating. The government tried to help businesses survive to regulate the employment equilibrium. The
government tried to control the oil prices to deflate the essential commodity prices.

Many provinces and territories are feeling the effects of prior tightening and closing of borders, restrictions on
the movement of people and goods, and the closure of businesses, which all had the potential to disrupt
supply chains. As a result, the status of supply chains and the impact they have on their respective economies
is of great interest. The Federal government by addressing the provincial wise demand and supply made plans
with the provincial government and authorities for the free flow of goods and commodities through the
supply chain, nationwide.
ASSIGNMENT 2: THE ROLE OF GOVERNMENT IN THE ECONOMY (15%)
“As Canada's government spends, central bank bears burden of taming inflation”

Answer 5. Can you think of any other possible explanations for the increasing price of goods and services in
Canada? Think outside of the box, and feel free to question the economic models and relationships we have
learned about in class. Explain your answer. NOTE: In this question, I am asking for your opinion; no additional
research is required. 75-100 words. (/4)

Answer: The Central Bank of Canada is aggressively moving its interest rates upwards, and the federal
government on the other hand planning to cut down its fiscal spending to tackle inflation but there are some
other factors which are still disbalancing the demand and supply of goods and services. One of the major
factors nowadays which is affecting the inflation rate in Canada is:

Geopolitical factor:

- The Ukraine-Russia war is now turning into a global recession, as the price of oil is getting higher day
by day. The global financial market faced a huge hit due to this where countries are putting sanctions
on Russia. The federal government is welcoming the refugees from Ukraine to provide them with a
new home in Canada but it also burden-up the government’s fiscal policies.
- China has still not recovered from COVID-19, because of which many items for which Canada is
dependent upon China is struggling to fulfil the supply. For example, the automobile industry and the
electronic market are facing a huge shortage of semiconductor chips, due to which car prices and its
waiting period in Canada are increasing on a monthly basis. China dominates this market and
regulates the supply and which leads to a spike in demand in China for electronic goods.

The export and import of commodities are a usual business for any country but if any country like Russia or
China dominates the world with its natural resources or production dependency then they directly or indirectly
influence the global market by regulating supply and also can disrupt any economy.