08 Jun Question Assume that the country begins wit
Question
Assume that the country begins with the real GDP being equal to Y*.
a. Suppose the world price for raw materials declines because of an economic slowdown in
developing countries. Given that Canada is a net exporter of raw materials, what is the likely
effect on Canadian Aggregate Demand? Show this in an AD/AS diagram (assuming no change
in the exchange rate).
b. Suppose instead that there is a decrease in the demand by foreigners for Canadian ?nancial
assets such as government bonds. What is the direct effect on Canadian agregate demand?
Show this in an AD/AS diagram (assuming again no change in the exchange rate).
c. Both of the shocks described above are likely to cause a depreciation of the Canadian dollar on
foreign—exchange markets. As the Canadian dollar depreciates, What are the effects on agregate
demand in part (a) and in part (b)? Show these “secondary” effects in your diagram and explain.
d. Given your answers to parts (a), (b), and (c), explain Why the appropriate monetary policy
response to a change in the exchange rate depends on the cause of the exchange rate change.
What are the appropriate responses to each of the shocks (assuming they occur separately)?
Assume that GDP is $6,000, personal disposable income is $5,100 and the government budget deficit is $200. Consumption is $3,800 and the trade deficit is $100. How large is national saving?
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