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Suppose the central bank’s monetary policy leads to a decline in interest rates (we have introduced the monetary policy and AD curve in Chapter 24 lecture). Explain what happens to the AD curve and to short-run equilibrium output. 2. Suppose the Government of Canada reduces the level of government purchases (with tax rates unchanged). Explain what happens to the AD curve and to short-run equilibrium output. 3. Suppose a fast-growing world economy pushes up the demand for oil, an internationally traded commodity. As a result, the world price for oil rises. Suppose further that oil is an important input to Canadian firms’ production processes, and thus this exogenous “oil-price shock” drives up firms’ costs immediately. Explain what happens to short-run equilibrium output, assuming that no Canadian firms produce oil. 4. Now repeat the exercise in (c) but assume, as is the case, that Canada is a producer and net exporter of oil. Explain whether and why this changes the economy’s response to the exogenous increase in world oil prices.

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