Question

ction (1) - Protected View - Saved to this PC O Search References Mailings Review View Help et can contain viruses. Unless you need to edit, it's safer to stay in Protected View. Enable Editing 2017100 1. What effects would each of the following have on aggregate demand or aggregate supply (other things held constant)? Explain them to score high marks. a. The Canadian dollar loses its value and gets weaker by 3% against the US dollar. Ans: b. A S2 increase in the excise tax (production) on a pack of cigarettes. Ans: 1 c. A reduction in interest rates at each price level. Ans: d. COVID-19 reduces the demand for oil and thus oil prices fall sharply in the international market, Ans: e. The US economy, the largest trading partner of Canada, goes into recession due to COVID -19. Ans: Soon o 6 7 8

Answer 1

a) If canadian dollar loses its value against US dollar by 3% means Canadian dollar is depreciated against US dollar. This make goods produced in Canada cheaper in US market. They will demand more of Canadian goods resulting in export of goods to US. Aggregate demand increases because of increase in exports and thus AD curve shifts rightwards.

b) A$2 increase in the excise tax on the pack of cigrette reduces the supply of cigrette.Some part of this tax is transferred to consumer who smoke thus rise in the price of cigrette discourages consumption. Thus both supply and quantity demanded of cigrette fall. But this will not have huge impact on Aggregate demand and supply because only a proportion of total population smoke.

C) Interest rate is a primary determinant of investment. Lower interest rate makes the cost of borrowing cheaper and thus investment increases. A decline in the interest rate boost investment which increased aggregate demand thus AD curve shifts rightwards.

d) Oil is a chief ingredient in the production process. Fall in the prices of Oil due to COVID 19 makes the cost of production cheaper. Firms can produce more. Thus aggregate supply of goods increases and AS curve shifts rightwards.

e) If the US economy which is largest trading partner of Canada goes into recession then Aggregate demand in the Canadian economy falls. As there is huge exports and imports of goods and services take place between them. A fall in the export to US will reduce the aggregate demand of goods in the economy. Thus AD curve shifts leftwards.