Suppose that the Canadian economy is governed by the following equations Y = Y, - a(r -p)+e; T: = i- E17+1 T = E-1T +(Y - Y1) + vt E1T+1 = T i = T +p+0(7 – n)+by (Yt - Y;) (1) (2) (4) (5) Since the coefficient is negative, more sensitive implies a coefficient less than-80 (e.g.,-90,-100, etc). Recall that the sacrifice ratio is computed by dividing the output lost by the amount of disinflation. (a) Derive the long-run equilibrium for the dynamic AD-AS model. Assume there are no shocks to demand or supply and that inflation has stabilized.

Describe an economic environment which would be characterized by the term "stagflation". Using an AD - AS diagram, depict and given an example of a macroeconomic shock that would take an economy from a long - run equilibrium to a situation of stagflation. Label all points on the graph completely and point out the key characteristics associated with stagflation on your graph.

Detail the macroeconomic policies that might be used to tackle the effects of a severe negative supply shock and explain the dilemmas faced.

Use the graph below to answer questions #4-5. This graph depicts the AD-AS model, which involves the Aggregate Demand curve (AD), Aggregate Supply curve (AS) and Long Run Aggregate Supply curve (LRAS). Our assumptions with this model match those from class. LRAS AS AD Assume in the multiple choice questions below that our starting point is pt A. Assume that in the months leading up to a major election, the Federal government enacts legislation that significantly increases government spending. Assume further that government pays for this spending by increasing the money supply. Based on our discussion of the self-correcting mechanism, how would this policy affect the graph in the short run and long run? Itranscript Oa. in the short run, AD will increase, but over the long run, AS will eventually shift upward as workers begin to ask for cost of living increases from their employers Ob. in the short run, AD will increase, but over the long run. AS will eventually shift leftward as workers…

Which of the following would initiate a negative AD shock? taxes decrease monetary policy lowers the federal funds interest rate taxes increase household wealth (e.g. equity and/or housing prices) increase

Use shifts of the AD and AS curves to explain (a) the U.S. experience of strong economic growth, full employment, and price stability in the late 1990s and early 2000s and (b) how a strong negative wealth effect from, say, a precipitous drop in the stock market could cause a recession even though productivity is surging.