There is quite a bit of trade between Canada and the east coast of the United St

Question

There is quite a bit of trade between Canada and the east coast of the United States. After Super Storm Sandy destroyed an immense amount of property along the U.S. eastern seaboard, firms in the area directed their own production toward the rebuilding effort, but they also greatly expanded their purchases from Canada to help with the rebuilding.

Consider the graph of Canada’s economy depicted below. Before the storm, the Canadian economy was at the intersection of the AD1 aggregate demand curve and the SRAS1 short-run aggregate supply curve, which is depicted by Point A. Suppose that for the remainder of this question, Sandy did not do any damage to Canada. This is an approximate characterization of the impact of the storm, because most of the damage that it inflicted was in the United States.

When the east coast of the United States starts rebuilding after the storm, the economy in Canada will be influenced in the following way.

A. Long-run aggregate supply

B. Short-run aggregate supply

A. left,

A. Point A

.B. Point B

.C. Point C

.D. Point D

B. shift to the right

C. remain unchanged.

Once all the storm damage has been repaired, Canada's aggregate demand curve will shift back to

B. AD3

B. Point D

C. Point C.

D. Point A.

Explanation / Answer

Answers:

C. Aggregate Demand

B. Right

C. Point C

C. remain unchanged

A. AD1

D. Point A

Explanation: When the US firms demand more goods from Canada for their rebuilding efforts, aggregate demand in Canada will increase and the Aggregate Demand curve will shift towards the right. Since the SRAS curve is fixed, the economy will operate at point c. The demand increase will not increase potential output of Canada so the LRAS will remain unchanged. Once the damage has been repaired, the aggregate demand will be back to its original position i.e. it will shift towards the left and the economy will operate in the original position that is point A.

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