Consider the global recession that began in late 2008. In terms of the AD/AS model, which of the following statements best describes the macroeconomic effect on Canada's economy?
A)Potential GDP fell, which reduced actual national income.
B)The AS curve shifted to the left due to increased factor prices, which created a recessionary gap.
C)The AD curve shifted to the right due to reduced demand for Canadian exports, which created a recessionary gap.
D)The AD curve shifted to the left due to reduced demand for Canadian exports, which created a recessionary output gap.
E)The AS curve shifted to the right due to increased factor prices, which created a recessionary gap.

Question

Quizplus · Accepted Answer

During the global recession, the demand for Canadian exports decreased, leading to a leftward shift of the AD curve. This created a recessionary output gap, as actual output fell below potential GDP. Option A is incorrect because potential GDP does not change due to a recession. Option B is incorrect because increased factor prices would lead to a rightward shift of the AS curve, not a leftward shift. Option C is incorrect because reduced demand for Canadian exports would lead to a leftward shift of the AD curve, not a rightward shift. Option E is incorrect because increased factor prices would also lead to a rightward shift of the AS curve, not a leftward shift.

Consider the Global Recession That Began in Late 2008