Oil Price Falling in Canada

Part 1

Q 1:

Answer:

1. Because of MV=PY, a decrease in money M causes a decrease in PY. If the Bank of Canada reduces the money supply, the aggregate demand curve shifts down.
2. In the short run: The price level is fixed. So the aggregate supply curve is flat. When the output falls but the price level does not change.

In the long run: We know that the price level is flexible, so the prices fall cause the economy returns to full employment. For example, there is 10% reduction in the money supply, when velocity is constant. ΔM/M+ΔV/V=ΔP/P+ΔY/Y:

In the short run, the price level is fixed, because ΔM/M+ΔV/V=ΔP/P+ΔY/Y and 10% reduction in the money supply causes a 10% decreasing in output.

In the long run, the price is flexible, because ΔM/M+ΔV/V=ΔP/P+ΔY/Y. then 10% reduction in money supply causes 10% decreasing in price level.

1. Okun’s law:
      relationship between unemployment and real GDP (negative)    

ΔY/Y = 3.5% - 2* ΔU

In the long run: output and unemployment return to their natural levels (no long change in unemployment).

In the short run: output decrease, unemployment rate increase.

1. Because S = Y – C – G    Y falls then S falls causing the real interest rate increase.

Q 2

Answer:

1. They change the disposable income money.
2. In the Keynesian cross, the multiplier will become smaller
3. It will causes the IS curve to be more inelastic.

Q 3

Answer:

1. Because (M/P)^d = 1000 - 100r  and  M=1000 P=2

The real money supply is (M/P)^s=500

[pic 1]

1. 500 = 1000 - 100r   then r = 5

1.   600 = 1000 – 100r  then r = 4  the equilibrium interest rate decrease from 5% to 4%

1.    M/P = 1000 – 100r  if r = 7

M/2 = 1000 – 100*7   so M=600

So it must decrease the nominal money supply from 1000 to 600

Part 2

Answer:

First of all, the IS-LM refers to Investment Saving – Liquidity Perference Money Supply. According to ues this model, it helps me to kown the things in the Department’s explanation like the interaction between the market for goods and sevices and the money market. We can make a good graph to conclue the what article said. At the same time, it is obviously to see the relationship between the data.