Question

In: Economics

(a) Use a graphical approach to explain the effect of the following changes. i. A new...

(a) Use a graphical approach to explain the effect of the following changes.

i. A new Covid 19 face mask, made in America, is successful in sales to canada.

   ii. canada reduces its interest rate compared to the U.S., causing investors to sell canada’s bonds and buy U.S. bonds.

iii. Canadians, unhappy with monetary unification, transfer their bank balances to the U.S.

Solutions

Expert Solution

i) New COVID-19 face mask which is imported from U.S. in Canada will reduce aggregate demand of Canada because aggregate demand and imports have a negative relationship with each other. It will shift demand curve of Canada from AD to AD1 which will reduce price of mask produced in Canada from P to P1 and reduce its quantity sold from Y to Y1.

ii) Canada reduces its rate of interest which induce investors to buy US bonds and sell Canadian bonds which will work as a cash leakage from the economy and reduce overall investments in Canada. It will shift demand curve of Canada from AD to AD1 which will reduce price from P to P1 and reduce quantity traded from Y to Y1.

iii) Canadians unhappy with monetary unification, transfers their bank balance to the U.S. It will raise demand of U.S. Dollar and reduce demand of Canadian dollar which will appreciate U.S. Dollar against Canadian Dollar. Appreciation of currency will make Canadian goods comparatively cheaper for U.S. consumers which will raise exports of Canada which tends to raise aggregate demand of it and shift demand curve to its right from AD to AD1.


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