GM announced that it will close its Oshawa truck plant in 2009 and a Windsor transmission plant in 2010. Ford also plans a 10 percent cut in white-collar, salaried positions. In total, over 4000 direct jobs will be lost. This is chilling news for Ontario because for every job in an assembly plant, there are 7.5 jobs with auto-parts suppliers and other companies. Using appropriate diagrams, answer the following questions.
a. Is there a trade-off between the unemployment rate and the inflation rate in the short run? How can the Phillips curve be used to answer this question?
b. What is the relationship between the Phillips curve, aggregate demand, and aggregate supply?
c. 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?
d. If the Bank of Canada continues to take expansionary monetary policy, how are the unemployment rate and inflation affected? (Use both Phillips curve and AS-AD graphs in your explanation.)
e. 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?