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econ 105_tut question_chapter 23%2624_students

econ 105_tut question_chapter 23%2624_students - SFU Econ...

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SFU Econ 105 Week 9 Summer 2013 1 / 4 Name: Answer key Date: SFU ID: Section: 1. Each of following event is either a cause or a consequence of a shift in the AD or AS curve in Canada. Identify which it is and, if it is a cause, describe the effect on equilibrium real GDP and the price level. ( Hint: Use a graph of the AD/AS) a. OPEC’s actions significantly increased the world price of oil in 1979 ~ 1980 This is the cause of a shift in the AS curve or a negative aggregate supply shock. A rise in the world price of oil (input price) leads to an increase in firms’ costs of production, thus this results in a reduction in SRAS. As a result, real GDP falls, but PL rises. b. During 1996~2001, Canadian real GDP was growing at a healthy pace but inflation showed no signs of rising. This recovery is the consequence of a positive AD shock applied to a flat portion of the AS curve , or a positive AD and AS shocks by the same magnitude. c. In 2009, by providing over $63 billion in timely fiscal stimulus, Canada's Economic Action Plan made important investments. Taxes have been reduced for Canadian families and job-creating businesses. This is a cause of a positive AD shock in Canada's economy. The onset of higher government spending in Canada as part of Canada's Economic Action Plan would have led to increasing AD. As a result, both real GDP and PL rise. d. Beginning in 2006, the Canadian government reduced both personal and corporate income taxes. This would be a cause of positive AD and AS shocks. A reduction in personal income-tax rates will increase Yd, Thus, it leads to an increase in desired consumption. Also, a reduction in corporate income-tax rates will increase firms’ desired investment due to tax savings.
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SFU Econ 105 Week 9 Summer 2013 2 / 4 The lower corporate taxes will also reduce firms’ production costs. Thus, unit costs fall
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