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In some countries there is a concern that the government will run large budget deficits and...

In some countries there is a concern that the government will run large budget deficits and force the country’s central bank to “monetize the deficit” by purchasing government bonds and providing money to the government. The resulting increase in the money supply will then lead to high rates of inflation. Briefly explain why this is not a concern in Canada.

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Answer #1

Canada has been robust economy with unemployment nearing 5.8 percent and inflation nearing 2.25 percent. Any rise in inflation will firm up prices and also will be coupled by rising GDP growth. Moreover as inflation rises, Canada will reach full employment levels as unemployment reduces based on Phillip curve effect.

Hence rising inflation will be in well considerable range which will be compensated by rising real GDP as well as lower unemployment and hence is not problem in Canada.

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