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Page 253 1a. A reduction in household tax rates increases consumption, shifting aggregate demand to the right. b. A slump in share prices reduces household wealth, which decreases consumption and shifts aggregate demand to the left. c. A rise in the price level does not cause a shift in the aggregate demand curve. Instead, it causes a movement leftwards and upwards along the curve, due to the wealth and foreign trade effects. d. A fall in Canadian interest rates increases investment and the consumption of durable items. Both these trends cause aggregate demand to shift to the right. e. A rise in the US-dollar value of the Canadian dollar makes Canadian exports more expensive for Americans and imports from the US cheaper for Canadians. The result is a decrease in net exports, shifting aggregate demand to the left. f. A fall in business confidence decreases investment, shifting aggregate demand to the left. 2. Page 258 1a. A rise in the economy’s capital stock causes a long-run increase in aggregate supply. b. A strengthening of government regulations results in a long-run decrease in aggregate supply. c. An increase in the price of electricity causes a short-run decrease in aggregate supply. d. A reduction in wage rates leads to a short-run increase in aggregate supply e. A contraction in the amount of available land results in a long-run decrease in aggregate supply. f. A decline in the size of the labour force causes a long-run decrease in aggregate supply. g. Technological progress causes a long-run increase in aggregate supply. 2. Page 263 1a. When the price level starts above the equilibrium point, real output exceeds real expenditures. The result is an unintended increase in inventories, or positive unplanned investment, which reduces the price level. The price level continues to fall until the discrepancy disappears once equilibrium is reached. b. In the opposite case, when the price level begins below the equilibrium point, real expenditures exceed real output. The resulting unintended decrease in inventories, or negative unplanned investment, raises the price level until the discrepancy is eradicated at the equilibrium point. 2a. Investment is related to saving, because both are connected with financial markets. Government purchases are related to taxes, given that both are associated with government. Exports are related to imports, since both represent ties with the rest of the world. b. No. Investment does not need to equal saving. Nor are government purchases necessarily equal to taxes, or exports equal to imports. Only total injections and total withdrawals need to be in balance when the economy is in equilibrium. 3a. With a recessionary gap, actual output is below its potential level. Because the natural rate of unemployment is associated with potential output, the fact that actual output is lower than its potential means the actual unemployment is above its natural rate. b. With an inflationary gap, actual output exceeds its potential level, which means that the actual unemployment rate is temporarily less than its natural rate. c. In a protracted recessionary gap, not just cyclical unemployment but also structural unemployment gradually rises, as some cyclically unemployed workers become structurally unemployed after being out of work for an extended period. d. Page 269 1a. Expansions tend to be quite long – sometimes close to a decade or more. In contrast, contractions are often relatively short. b. The most dramatic contraction in Canadians’ per capita real output occurred during the Great Depression of the early to mid-1930s. The most dramatic expansion occurred during the latter part of the 1930s and then during the 1940s, as the Canadian economy recovered from the Depression and was stimulated by the spending associated with World War II. 2. At times, expectations by households and businesses can serve as a self-fulfilling prophecy, with widespread belief in a certain outcome ensuring that the outcome will occur. For example, if a burst of pessimism causes both households and businesses to believe that there will be an economic contraction, the decrease in spending by these sectors will reduce real output as aggregate demand shifts to the left. Similarly, a burst of optimism by households and businesses will increase spending and therefore raise real output as aggregate demand shifts to the right. But such self-fulfilling prophecies occur only at certain points in the business cycle, prompted by other events, such as an initial contraction in spending and output in the case of pessimistic expectations, or an initial expansion in spending and output in the case of optimistic expectations. |