ocon 2102 all assignment 2 ferences Mailings Review View Zotero 10 1. For each o
ID: 1103424 • Letter: O
Question
ocon 2102 all assignment 2 ferences Mailings Review View Zotero 10 1. For each of the following situations, use an AD/AS model to describe what happens to price levels and output in Canada in the short-run. In each case assume the economy starts in long- and short-run equilibrium, and show the appropriate shifts in the AS or AD curves. (Award: 24 points) a A stock market crash reduces people's wealth. It will lead to less disposable income into hands which shifts the AD curve to the left. As the result the of the output and price level drop in the short run. " The spread of democracy around the world increases consumer confidence in Canada. It willi lead to increase in exports and investment. This is an inflow of capital which creates a threat for the US currency. In short run, AD shifts to right, price level and output b. . level both increase. The European economy crashes. This means that people in Europe will consume and ihvest less and save more. This AD will fall and as well as output and price will fall. c. d. Canada enters into an arms race with China, resulting in a significant increase in military spending. e. A revolution in Iran results in a significant reduction in the world's supply of oil. f. Terrorist activities temporarily halt the ability of Canadians to engage in certain productive activities such as transportation and finance. g Intel develops a new computer chip that is faster and cheaper than previous chips.T h. A summer of perfect weather in the prairies leads to record harvests of corn, wheat, and soybeans. s MacBook Air FS F6 F7 F8 19Explanation / Answer
d) Increase in military spending means increase in government spending which increases G component of AD and shifts the curve rightwards. So, price level and output level both rises.
e) Reduction in world's supply of oil decreases supply of oil in home country and shifts AS curve leftwards which leads to increase in price level and decrease in output level.
f) Decrease in the engagement of productive activities decreases the supply of commodity in the market, as a result AS curve shifts leftwards and causes increase in price level and decrease in output level.
g) New technology and cheap cost increases supply of commodity in the market as cost of production of firm reduces. This causes rightward shift of AS curve and causes increase in output level and decrease in price level.
h) Record harvest crops means supply of crops will be higher, this shifts AS curve rightwards and decreases price level and increases output level.
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