Question

mat Tools Table Window Help Review out References A Aa Po APA Mailings E 75% MT2 Econ 104 - 2020W - D2L View Acrobat Table Design Layout 2 T AaBCcDdEe Aalbcdee AaBbCcDc AaBbCcDdE: AaBb team No Spacing Heading 1 Heading 2 Normal ECON 104 MT2 Take Home Keith Yacucha Short Answer: Comparative Statics and Adjustment (20) Be sure to read each question in full. 1. Consider the Canadian Economy in long-run equilibrium. A sudden decrease in the price of oil causes the price of gasoline and energy (inputs) to fall. a. Graph the impact of this shock on the Canadian Economy, State whether the Canadian economy is in an expansionary or recessionary output gap following this shock. [2] b. Would we expect to witness an observed unemployment rate higher or lower than the natural unemployment rate following this shock? Briefly discuss why. [1] c. Explain, fully, how the economy would naturally adjust back to equilibrium (2) 2. Consider the Canadian Economy in long-run equilibrium. A sudden pandemic has caused

Answer 1

1) a)

Date: Page No. ZRAS AD Llongaun quétial equalibu - Shortsun equilibruins Aftushock Bice у у Output

Initially economy was in long run equilibrium at point E .

Decrease in price of gasoline in oil will decrease Production cost of firms , so they will be selling at lower price so Short run aggregate supply will increase and SRAS will shift to righ to SRAS2.

And economy is at new short run equilibrium at point F,where equilibrium output is y2 and price p2.

New EQUILIBRIUM output is higher than fulk employment level output ,so it is expansionary or inflationary gap.

B)In long run equilibrium, economy works at Natural rate of unemployment.

Increase in output from natural level of output Increases employment which Decreases unemployment and unemployment falls below natural rate of unemployment.

So at jew EQUILIBRIUM unemployment rate will be lower than Natural rate of unemployment.

C)As economy is in inflationary gap .so prices will start Increasing and increasing demand of labour will cause workers to demand higher wage.as firms start paying higher wages their production cost Increases and aggregate supply Decreases and SRAS curve shifts lefttwards to its initial position.

So economy will again reach at its natural level of output at point E with natural level of unemployment and long run equilibrium.