The Canadian economy suffered two major shocks in 2008, leading to the severe recession of 2008–2009. One shock was related to oil prices; the other was the slump in both consumer and business confidence. This question analyzes the effect of these two shocks on GDP using the AD–AS model. Draw typical aggregate demand and short-run aggregate supply curves. Label the horizontal axis “Real GDP” and the vertical axis “Aggregate price level.” Label the equilibrium point E1, the equilibrium quantity Y1, and equilibrium price P1. Would an increase in oil prices cause a demand shock or a supply shock? Redraw the diagram from part (a) to illustrate the effect of this shock by shifting the appropriate curve. The New Housing Price Index, published by Statistics Canada, calculates that Canada’s home prices fell by an average of 3% in the 12 months between April 2008 and April 2009. Business fixed capital formation fell by 19% during the same period. Would the fall in home prices and business fixed capital formation cause a supply shock or demand shock? Redraw the diagram from part (b) to illustrate the effect of this shock by shifting the appropriate curve. Label the new equilibrium point E3, the equilibrium quantity Y3, and equilibrium price P3. Compare the equilibrium points E1 and E3 in your diagram for part (c). What was the (net) effect of the two shocks on real GDP and the aggregate price level (increase, decrease, or indeterminate)?
The Canadian economy suffered two major shocks in 2008, leading to the severe recession of 2008–2009. One shock was related to oil prices; the other was the slump in both consumer and business confidence. This question analyzes the effect of these two shocks on GDP using the AD–AS model. Draw typical aggregate demand and short-run aggregate supply curves. Label the horizontal axis “Real GDP” and the vertical axis “Aggregate price level.” Label the equilibrium point E1, the equilibrium quantity Y1, and equilibrium price P1. Would an increase in oil prices cause a demand shock or a supply shock? Redraw the diagram from part (a) to illustrate the effect of this shock by shifting the appropriate curve. The New Housing Price Index, published by Statistics Canada, calculates that Canada’s home prices fell by an average of 3% in the 12 months between April 2008 and April 2009. Business fixed capital formation fell by 19% during the same period. Would the fall in home prices and business fixed capital formation cause a supply shock or demand shock? Redraw the diagram from part (b) to illustrate the effect of this shock by shifting the appropriate curve. Label the new equilibrium point E3, the equilibrium quantity Y3, and equilibrium price P3. Compare the equilibrium points E1 and E3 in your diagram for part (c). What was the (net) effect of the two shocks on real GDP and the aggregate price level (increase, decrease, or indeterminate)?
Chapter20: Aggregate Demand And Supply
Section: Chapter Questions
Problem 3SQP
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The Canadian economy suffered two major shocks in 2008, leading to the severe recession of 2008–2009. One shock was related to oil prices; the other was the slump in both consumer and business confidence. This question analyzes the effect of these two shocks on
- Draw typical aggregate demand and short-run
aggregate supply curves. Label the horizontal axis “Real GDP” and the vertical axis “Aggregate price level.” Label the equilibrium point E1, theequilibrium quantity Y1, andequilibrium price P1. - Would an increase in oil prices cause a demand shock or a supply shock? Redraw the diagram from part (a) to illustrate the effect of this shock by shifting the appropriate curve.
- The New Housing Price Index, published by Statistics Canada, calculates that Canada’s home prices fell by an average of 3% in the 12 months between April 2008 and April 2009. Business fixed capital formation fell by 19% during the same period. Would the fall in home prices and business fixed capital formation cause a supply shock or demand shock? Redraw the diagram from part (b) to illustrate the effect of this shock by shifting the appropriate curve. Label the new equilibrium point E3, the equilibrium quantity Y3, and equilibrium price P3.
- Compare the equilibrium points E1 and E3 in your diagram for part (c). What was the (net) effect of the two shocks on real GDP and the aggregate price level (increase, decrease, or indeterminate)?
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Step 1: Define macroeconomic assessment
VIEWStep 2: Draw the typical aggregate demand and short-run aggregate supply curves and label them
VIEWStep 3: Explain if an increase in oil prices would cause a demand shock or a supply shock
VIEWStep 4: Explain the scenario of a drop in housing prices and business capital formation
VIEWStep 5: Analyze the net effect
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