Trade-off between the unemployment rate and the inflation rate
In April 2020, the Canadian economy lost about 2 million jobs amid the Covid-19 crisis. According to Statistics Canada, the unemployment rate soared to 13%, up from the 7.8% recorded in March of 2020. Around the same period, inflation rate dropped from 2.2% in February to 0.9% in March and -0.2% in April. Use appropriate graph(s) to explain the following.
a) Was there a trade-off between the unemployment rate and the inflation rate between the months of March and April 2020? How can the Phillips curve be used to answer this question?
b) If the unemployment rate and inflation are both rising, can this be explained by a movement along a given Phillips curve? What must be happening to aggregate demand and aggregate supply? What must be happening to the Phillips curve?
c) If the Bank of Canada continues to undertake expansionary monetary policy, how will the unemployment rate and inflation be affected? (Use both Phillips curve and aggregate supply – aggregate demand graphs in your explanation.)
d) Is there a trade-off between the unemployment rate and inflation in the long run? How is the long run aggregate supply curve related to the long run Phillips curve?