Question

3. There is an increase in the wages in Canada, which causes an increase in cost of production by firms in the country.

a. Use the AS/AD model to demonstrate the short-run impact of this event on the aggregate demand (AD) curve, the short-run Aggregate Supply curve (AS), real GDP, price level and unemployment. Your answer should include:

                            i. An AS/AD graph with all curves and quantities clearly labeled. For curves and quantities that change, label their old values with a “0” subscript and their new values with a “1” subscript. For curves and quantities that don’t change, leave out the subscript.

ii. Specific predictions for which variables will go up, which will go down, which will remain the same, and which could go up or down.

b. Use the AS/AD model to demonstrate the long-run impact of this even on the Aggregate Demand curve, the short-run Aggregate Supply (AS) curve, the long-run aggregate supply (LRAS) curve, real GDP, and the price level. Your answer should include:

                            i. An AS/AD graph with all curves clearly labeled. For curves and quantities that change, label their old values with a “0” subscript  and their new values with a “1” subscript. For curves and quantities that don’t change, leave out the subscript.

                          ii. Specific predictions for which variables will go up, which will go down, which will remain the same, and which could go up or down.

Answer 1