Question

Question 2:

In October 2018 marijuana became legal in Canada, and since then marijuana is legal for adults to own and use it. As it became legal some Canadians invested in growing marijuana and some retail stores opened to sell this product.

1. Use the AS-AD model in the SR to discuss the impact of this policy on the short-run and long-run equilibrium in Canada.
2. Use the AS-AD model in the LR to discuss the impact of this policy on the short-run and long-run equilibrium in Canada.

Answer 1

a. In the short run, initial equilibrium in the AD-AS diagram occurs at point E1. Since Canadians invested in growing marijuana, this increased the level of investment expenditure in the economy leading to increase in the level of aggregate demand in the economy. When new retail stores open to sell the product this increases number of firms in the market and thus also shifts aggregate supply curve rightwards to AS' such that new equilibrium occurs at point E2 where equilibrium quantity of marijuana has increased and impact on prices on ambigious as it depends on the magnitude of the shirt of AS and AD curves.

b. In the long run, the supply curve becomes vertical. In the long run , the increase in the level of actual GDP will also increase the level of potential GDP in the economy to Y1f. The new equilibrium shifts from point E1 to point E2 where the level of full employmemnt GDP has increased and price level in the economy has decreased.