the Canadian government is also offering a 75% wage subsidy to small and medium businesses. Predict...

the Canadian government is also offering a 75% wage subsidy to small and medium businesses. Predict the impact of this policy on income, the price level and the interest rate using the AS-AD model. Use a diagram and make sure that you give a detailed explanation of the economic reasoning behind the change in each variable.

Solutions

Expert Solution

This economy was initially at long-run equilibrium, and its current output () was equal to its full employment output ( ).

Wage subsidy give the necessary boost the firms for staying afloat during the difficult times. This will help the firms remain functional in the short run and reduce cost of labor.

. At the old price level, SRAS shifts rightward from to would exceed AD. This surplus output puts downward pressure on the price level until the economy assumes a new short-run equilibrium at a lower price level () and higher output (). Because output has increased, the unemployment rate has decreased.

Rahul Sunny answered 5 months ago

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