Answer to Question #51258 in Macroeconomics for bob

Question

For each of the following events, describe the effects on the Canadian economy assuming that it is originally in long run equilibrium. For each, explain the short and long run effects in the context of an aggregate supply and aggregate demand diagram and any adjustment from short to long run equilibrium.
(a) As a result of a correction in Canadian housing prices, domestic consumption spending falls.
(b) The Bank of Canada pursues an expansionary monetary policy.
(c) The discovery of a cheap “cold fusion” technology reduces other energy prices [Hint: Canada is an
exporter of traditional energy products.]

Answer 1

(a) As a result of a correction in Canadian housing prices, domestic consumption spending falls, so the aggregate demand curve will shift to the left, the equilibrium output and price level will decrease. In the long-run aggregate supply will decrease too, so the price level will adjust to the initial point, but the output will decrease more.
(b) If the Bank of Canada pursues an expansionary monetary policy, the money supply will increase, so the aggregate demand increase, the aggregate demand curve will shift to the right, the equilibrium price level and output will increase. But in the long run the aggregate supply curve will shift to the left, so the price level will increase again, but the equilibrium output will adjust to the beginning point.
(c) If the discovery of a cheap “cold fusion” technology reduces other energy prices, the aggregate supply will decrease, so the price level will increase and the output will decrease. In the long-run the aggregate demand will increase and the output will return to the initial level, but the price level will increase again.