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Answer to Question #50839 in Macroeconomics for Matthew Houston

Question #50839
Using diagrams for aggregate expenditures (AE) and aggregate demand and supply (AD-AS), show the short run effects each of the following scenarios has on the relevant economy. Be sure to identify the cause of any shift or movement along AE, AD, and/or SRAS. [Hint: Your diagrams for each part should look something like those in Figure 23-8, or 23-10 in your text.]
(a) Due to the decrease in world oil prices, Canadian oil and gas companies reduce investment spending. [4]
(b) Depreciation of the Euro leads to an increase in exports for the Euro-zone and a reduction in the marginal propensity to import in the Euro-zone. [5]
(c) Canadianproductivityrapidlyincreases,whileatthesametimeCanadianexportsincreaseduetoa growing US economy. [5]
Expert's answer
(a) Due to the decrease in world oil prices, Canadian oil and gas companies reduce investment spending, so the AE will decrease and AS curve will shift to the left, causing the price level to increase and real GDP to decrease.
(b) Depreciation of the Euro leads to an increase in exports for the Euro-zone and a reduction in the marginal propensity to import in the Euro-zone, so the AE will increase and AS curve will shift to the right, causing the price level to decrease and real GDP to increase.
(c) Canadian productivity rapidly increases, while at the same time Canadian exports increase due to a growing US economy, so the AE will increase and AS curve will shift to the right, causing the price level to decrease and real GDP to increase.

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