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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

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 1 year ago

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