1) Suppose that in response to COVID-19, some businesses have cancelled their investment plans. Assuming that aggregate output is demand-determined, what effect will this have, all other things equal, on the AE function and equilibrium national income? Will the AE function shift down or up and why? Will equilibrium national income rise or fall, and why?
2) Suppose again that COVID-19 is contributing to fears of a recession in the global economy. Consider the following news headline: “The foreign recession will hurt Canadian exporters.” Assuming that aggregate output is demand-determined, what effect will this have, all other things equal, on the AE function and equilibrium national income? Will the AE function shift down or up and why? Will equilibrium national income rise or fall, and why?
3) The unemployment rate in Canada in February was 5.6 percent, from 5.5 percent in January. Some have argued that reported unemployment rates are likely to be an understatement of the amount of “true” unemployment in an economy. What is the main weakness of the unemployment rate?
4) Some economists have criticized using GDP as a measure of the economic well-being of a country because it ignores non-marketand other activities. However, it remains useful. Why?
5) Explain, in detail, how the adjustment to macroeconomic equilibrium occurs when spending (AE) is less than production (Y). Be sure to discuss how inventories play a crucial role in the adjustment process. State what happens to real GDP, employment, and unemployment during the adjustment process.
Sample Solution
