Suppose the Canadian economy is in long-run equilibrium.Then suppose the value of the Canadian dollar increases.At the same time,people in Canada revise their expectations so that the expected price level falls.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 lead to a decrease in Canadian exports and an increase in imports, which will cause a decrease in aggregate demand. This will lead to a decrease in real GDP. However, the decrease in expected price level will cause a decrease in nominal wages and prices, leading to a decrease in the price level. Therefore, we can expect the price level to fall, while real GDP might rise, fall, or stay the same. Option D is the best choice as it includes the expected decrease in the price level.

Suppose the Canadian Economy Is in Long-Run Equilibrium