ECON 209 Lecture Notes - Lecture 1: Ceteris Paribus, Demand Shock, Aggregate Supply

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Chapter 23: output & prices in the short run. In chapter 21, the price remain constant: demand shocks & supply shocks. Using a diagram linking ad/as curves to ae curve (fig 28-3 in text), do the analysis for each of the following cases (ceteris paribus). In each case give a step-by-step explanation of how your diagram is affected, and why! (a) government reduces spending. G goes down, ae curve shift downward, ad shift to the left, there is a gap when the price doesn t change, so price goes down to fix the gap. Price go up, ae goes down (b) there is a reduction in the domestic income tax rate. When t goes down, it means z (slope) decrease, ae goes up and become more steeper. Ad shifts to the right, price goes up to fix the gap (c) speculation in foreign exchange markets increases the value of the canadian dollar.

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