Question

Harper: Economic Outlook 'Not So Positive'

Prime Minister Stephen Harper emerged from a meeting with Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney in Ottawa saying the world economic picture is "not so positive." The fear is that a failure to contain the European debt crisis will push a weak global economy into a recession. Harper and British Prime Minister David Cameron ended their meeting in Ottawa with a call for European leaders to take decisive action in order to avoid a second downturn and warned that governments must commit to cutting their debts and deficits and to resisting protectionism.

Source: CBC, September 27, 2011

What does Stephen Harper mean by "not so positive" and how would Canada be affected by a global recession?

When Stephen Harper uses the expression "not so positive" he means that ______.

A. income growth is negative in developing countries, and income disparity is growing among developing and developed countries

B. many countries could be heading towards recession, which would decrease Canada's exports

C. the values of world currencies have negative growth, which decreases investment by foreigners in Canada

D. European countries plan to cut investment to eliminate their government debt, and this will result in an increase in Canada's net transfers to Europe

The graph shows Canada's aggregate demand and short-run aggregate supply curves.

Draw a point at the short-run macroeconomic equilibrium. Label it 1.

Draw a curve to show the effect of the world economic picture that is "not so positive". Label it

AD1.

Draw a point to show the new short-run macroeconomic equilibrium. Label it 2.

Answer 1

"not so positive" economic condition as described by the Prime Minister implies that economic situation around the world is very weak and chances of global economy to slip into recession is very high.

The chances of European countries to go into recession are very high.

This will impact the world trade as well.

So,

The Prime Minister means that many countries could be heading towards recession, which would decrease Canada's exports.

Hence, the correct answer is the option (B).

The Prime Minister of Canada is fearing that the global recession would reduce the exports of Canada.

Net exports is a component of aggregate demand. So, reduction in exports will reduce the net exports.

This decrease in net exports will lead to decrease in the aggregate demand and will shift AD curve to the left.

Following is the required figure -