InflationinCanada.pdfVIP

ragan_econ_11ce_Ch30_topic 3/24/04 1:45 PM Page 1 Inflation in Canada 1 Inflation in Canada In this web-based section, we continue the discussion of Canadian inflation policy that we began in Chapter 30. We begin our study with the inflation of the 1970s. See Figure 1 for the time path of the annual inflation rate in Canada over the past three decades. In the discussion that follows, it will be useful to refer back to this figure frequently. The early 1970s witnessed quite expansionary fiscal and monetary policies. The money supply was expanded rapidly, and an inflationary gap opened up as real GDP exceeded its potential level. As a result, inflation began to rise. Expansion continued until early 1974, and inflation rose throughout that period. Then a worldwide reces- sion began, and Canada did not escape its effects. As a recessionary gap began to open up, the normal expectation was that inflation would diminish. Just then, however, the first OPEC shock hit. The prices of oil and other petroleum products soared. This negative supply shock reduced the growth of real GDP and sent inflation into the double-digit range. The result was stagflation. The Rise of Inflation: 1975–1980 Rather than viewing the stagflation as the result of rising oil prices, Canadian policy- makers interpreted the stagflation as accelerating wage-push inflation in a time of world recession. Having failed in an attempt to secure the agreement of organized labour in a wage and price controls Direct voluntary policy of reducing wage demands, the government decided to impose wage and government intervention