Suppose the Canadian economy is in long-run equilibrium. Then suppose the value of the Canadian dollar increases. At the same time, there is an increase in the number of skilled immigrants. What would we expect will happen in the short run?
A) Real GDP will rise, and the price level might rise, fall, or stay the same.
B) Real GDP will fall, and the price level might rise, fall, or stay the same.
C) The price level will rise, and real GDP might rise, fall, or stay the same.
D) The price level will fall, and real GDP might rise, fall, or stay the same.

Question

Quizplus · Accepted Answer

An increase in the value of the Canadian dollar will make Canadian goods relatively more expensive for foreigners, reducing the demand for exports in the short run, leading to a decrease in net exports. As a result, real GDP will fall in the short run. However, an increase in the number of skilled immigrants will increase the potential output of the economy in the long run. In the short run, this increase in the labour force may increase the production capacity of the economy and potentially lead to an increase in output. However, this may not necessarily translate to an increase in real GDP if net exports fall significantly due to the appreciation of the currency. The price level may rise, fall, or stay the same depending on the relative strength of the competing forces of increased supply from increased immigration and reduced demand from decreased net exports. Therefore, choice A is the best answer.

Suppose the Canadian Economy Is in Long-Run Equilibrium