Question

a) What are the main features of the Canadian economy in the second quarter of 2014? Did Canada have a recessionary gap or an inflationary gap in 2014? How do you know?

b) Use the AS - AD model to show the changes in aggregate demand and aggregate supply that occurred in 2013 and 2014 that brought the economy to its situation in mid-2014;

c) Use the AS - AD model to show the changes in aggregate demand and aggregate supply that will have occurred when full employment is restored;

d) Use the AS - AD model to show the changes in aggregate demand and aggregate supply that would occur if the government increased its expenditure on goods and services or cut taxes by enough to restore full employment.

e) Use the AS - AD model to show the changes in aggregate demand and aggregate supply that would occur if the economy moved into an inflationary gap. Show the short-run and the long-run effects.

Answer 1

a) Ans: The main features of the Canadian economy in the second quarter of 2014 can be defined as a multifold acceleration in economic growth.

1. Household expenditures increased.

2. Export volumes increased.

3. Increases in the volume of production.

4. The service industry's performance was recognizable.

5.  The automobile industry has a greater contribution to the economy from the starting of May.

6. Inflation increased during the spring due to higher prices for food, motel, and the transportation industry.

7. Employment growth remained unchanged as it is been calculated for a yearly basis. output growth represents the employment growth since early 2013.

b) According to figure A in 2013 there is an appreciation in aggregate demand and that leads to AD1 and the new price was P1 and quantity Q1. But in the long run, it will get adjusted with increased AS to As1 and the quantity again move to Q2 where the price will come down approx. the old one i.e. P. So here the overall output increased with a minimal increase in price compared to the old price.

c)Refers to the figure B, In case of employment before 2013, it reduced from the full employment level and come down from Y* to Y1, when there is a boost in the economy the employment also increased and the economy will establish a new employment level which is more the old one and the wage is higher than the old one but lower than the temporary one.

d) Referring, to Figure C, when the government took an expansionary policy to increase aggregate demand that leads to an increase in AD from AD to AD1. So the supply was not adjusted in a short period so the price increased to P1 as the interaction between AD1 and AS, so the new quantity is Q1 and the price is P1. In long run the As shifted to AS1 and the new quantity produced is Q2 and the price dropped to P(approx.).

e) Referring to Figure C, when there is an increase in demand and the supply is less than shift the inflation in terms of price from P to P1. but in the long run, the inflation will get adjusted as the AS to As1 shifted. so the price/inflation will come down P(approx.).