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In: Economics

For each of the following situations, use an AD/AS model to describe what happens to price...

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 describe the appropriate shifts in the AS or AD curves.

Instructions: You may select more than one answer. Click the box with a check mark for correct answers, and click to empty the box for the wrong answers.

a. A stock market crash reduces people’s wealth.

  • Aggregate demand shifts to the leftunanswered
  • Aggregate demand shifts to the rightunanswered
  • Aggregate supply shifts to the leftunanswered
  • Aggregate supply shifts to the rightunanswered
  • Output fallsunanswered
  • Output risesunanswered
  • The price level risesunanswered
  • The price level fallsunanswered

   

b. The spread of democracy around the world increases consumer confidence in Canada.

  • Aggregate demand shifts to the leftunanswered
  • Aggregate demand shifts to the rightunanswered
  • Aggregate supply shifts to the leftunanswered
  • Aggregate supply shifts to the rightunanswered
  • Output fallsunanswered
  • Output risesunanswered
  • The price level risesunanswered
  • The price level fallsunanswered

   

c. The European economy crashes.

  • Aggregate demand shifts to the leftunanswered
  • Aggregate demand shifts to the rightunanswered
  • Aggregate supply shifts to the rightunanswered
  • Aggregate supply shifts to the leftunanswered
  • Output fallsunanswered
  • Output risesunanswered
  • The price level fallsunanswered
  • The price level risesunanswered

   

d. Canada enters into an arms race with China, resulting in a significant increase in military spending.

  • Aggregate demand shifts to the leftunanswered
  • Aggregate demand shifts to the rightunanswered
  • Aggregate supply shifts to the rightunanswered
  • Aggregate supply shifts to the leftunanswered
  • Output fallsunanswered
  • Output risesunanswered
  • The price level fallsunanswered
  • The price level risesunanswered

   

e. A revolution in Iran results in a significant reduction in the world’s supply of oil.

  • Aggregate demand shifts to the leftunanswered
  • Aggregate demand shifts to the rightunanswered
  • Aggregate supply shifts to the rightunanswered
  • Aggregate supply shifts to the leftunanswered
  • Output risesunanswered
  • Output fallsunanswered
  • The price level risesunanswered
  • The price level fallsunanswered

   

f. Terrorist activities temporarily halt the ability of Canadians to engage in certain productive activities such as transportation and finance.

  • Aggregate demand shifts to the rightunanswered
  • Aggregate demand shifts to the leftunanswered
  • Aggregate supply shifts to the rightunanswered
  • Aggregate supply shifts to the leftunanswered
  • Output fallsunanswered
  • Output risesunanswered
  • The price level risesunanswered
  • The price level fallsunanswered

   

g. Intel develops a new computer chip that is faster and cheaper than previous chips.

  • Aggregate demand shifts to the rightunanswered
  • Aggregate demand shifts to the leftunanswered
  • Aggregate supply shifts to the rightunanswered
  • Aggregate supply shifts to the leftunanswered
  • Output fallsunanswered
  • Output risesunanswered
  • The price level risesunanswered
  • The price level fallsunanswered

   

h. A summer of perfect weather in the Midwest leads to record harvests of corn, wheat, and soybeans.

  • Aggregate demand shifts to the leftunanswered
  • Aggregate demand shifts to the rightunanswered
  • Aggregate supply shifts to the rightunanswered
  • Aggregate supply shifts to the leftunanswered
  • Output fallsunanswered
  • Output risesunanswered
  • The price level fallsunanswered
  • The price level risesunanswered

Solutions

Expert Solution

(a) When the stock market crashes the people's wealth.

  • The aggregate demand will shift to its left, since the people's wealth crashes, they will have low purchasing power and will not be able to demand more of the good
  • The aggregate supply curve will shift to its right indicating a fall in the supply. The producers will produce less due to the low purchasing power of the consumers
  • Due to the lower production, there will be a fall in the output from Q1 to Q2
  • A fall in the output will result in a dcerease in price from P1 to P2

  

(b) The spread of democracy around the world increases consumer confidence in Canada.

  • Aggregate demand shifts to its right indicating an increase in the demand due to the increased labour productivity, there will be more output produced with the same amount of labour
  • Aggregate supply shifts to its left, because of more labour involvement the producers cost of production will increase and thus causing an increase in supply
  • Output will increase
  • Price level will fall

(c) The European econmy crashes:

  • The aggregate supply curve will shift to its right indicating a fall in the supply. The producers will produce less due to less investment on capital.
  • The aggregate demand will shift to its left, since the economy crashes, they will have low purchasing power and will not be able to demand more of the good
  • Due to the lower production, there will be a fall in the output.
  • A fall in the output will result in a dcerease in price.

(d) Canada enters into an arms race with China, resulting in a significant increase in military spending.

  • Aggregate demand shifts to its right, indicating an increase in demand.

(e) A revolution in Iran results in a significant reduction in the world’s supply of oil.

  • Aggregate supply will shifts to its left indicating a fall in the supply level.

(f)  Terrorist activities temporarily halt the ability of Canadians to engage in certain productive activities

  • Aggregate supply shifts to its left, a fall in supply due to the production being stagnant.
  • The output falls due to less supply
  • The price level rises.

(g) Intel develops a new computer chip that is faster and cheaper than previous chips.

  • Rightward shift in the aggregate supply curve, the supply increase.

(h) A summer of perfect weather in the Midwest leads to record harvests of corn, wheat, and soybeans

  • Ooutput will increase
  • Price level will fall.

Rahul Sunny answered 2 years ago
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