Question 4 (12 marks)

Assume that Canada is initially in long run equilibrium with price level of P1 and GDP of Y1.

Discuss how each of the following four events would affect aggregate demand, the price level

and real GDP of Canada. Draw diagrams for each scenario. (12 marks - 4 marks each part)

a) There is a sharp increase in Canada's exchange rate

b) A wave of anti-Canadian sentiment sweeps the U.S. and people in U.S. decrease their

consumption of Canadian goods

c) There is a boom in China, which is a large importer of Canadian agricultural goods