Question

The U.S. experienced a major recession in 2008 & 2009? What is likely to happen to the price level and real GDP in Canada (our biggest trade partner) as a result? Select one: a. The price level and real GDP will both increase b. The price level and real GDP will both decrease C. The price level will increase, but real GDP will decrease d. The price level will decrease, but real GDP will increase e. The U.S. economy does not affect Canada's economy

Answer 1

Answer: (b) The price level and real GDP will both decrease.

When recession happens, generally people won't have money to buy all goods and services as unemployment and cuts in salaries are implemented. When demand for goods and services decreases, price levels of those will also be decreased by the manufacturers to sustain production. In the case when Canada is the biggest trading partner with the US, since a recession is occurred in the US, the demand for Canadian exports to US decreases. This causes the Canadian exporters to reduce prices. This change in price levels will also get affected in the Canadian market and eventually, due to less profits and liquidity in Canadian markets, Canada will also enter into the stage of recession.

When the economy gets in recession, as the country's production levels decreases, there will be decline in the Gross Domestic Product. It will affect two or more quarters of production in order to confirm the effect of a recession. And real GDP is measured in macroeconomic terms, the value of economic growth adjusted for price changes. Here, the country's growth rate also reduces.