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)The AD curve shifted to the right due to reduced demand for Canadian exports,which created a recessionary gap.
B)The AD curve shifted to the left due to reduced demand for Canadian exports,which created a recessionary output gap.
C)The AS curve shifted to the right due to increased factor prices,which created a recessionary gap.
D)The AS curve shifted to the left due to increased factor prices,which created a recessionary gap.
E)Potential GDP fell,which reduced actual national income.

Question

Quizplus · Accepted Answer

The global recession led to reduced demand for Canadian exports, which shifted the AD curve to the left. This created a recessionary output gap as actual output fell below potential output. Option A is incorrect as a shift of the AD curve to the right would have caused inflationary pressures, not a recession. Option C is incorrect as a shift of the AS curve to the right would have resulted in increased output and a decrease in prices, not a recession. Option D is incorrect as an increase in factor prices would cause a shift of the AS curve to the left, resulting in stagflation, not just a recession. Option E is incorrect as a fall in potential GDP would not directly cause a recession but rather a long-term decline in economic growth.

Consider the Global Recession That Began in Late 2008