THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 669

CHAPTER 24
11. An important difference between Keynesians and
monetarists rests on how long they think the long
run actually is. Is this statement true, false, or
uncertain? Explain your answer.

Predicting the Future
*12. Predict what will happen to aggregate output and
the price level if the Bank of Canada increases the
money supply at the same time that the government
implements an income tax cut.
13. Suppose that the public believes that a newly
announced anti-inflation program will work and so

Aggregate Demand and Supply Analysis

637

lowers its expectations of future inflation. What will
happen to aggregate output and the price level in
the short run?
*14. Predict the effect of an increase in the goods and
services tax (GST) on both the aggregate supply and
demand curves and on aggregate output and the
price level.
15. When there is a decline in the value of the dollar,
some experts expect this to lead to a dramatic
improvement in the ability of Canadian firms
to compete abroad. Predict what would happen
to output and the price level in Canada as a result.

Q U A N T I TAT I V E P R O B L E M S
1. Consider the following ISLM model.
Y * a + (A , bi)
i*

M
1
* ak * Y - b
h
P

where
a*

1
1 - (1 - t) * mpc

A is autonomous expenditure, b is the interest elasticity of investment expenditure, k is the income

elasticity of money demand, h is the interest elasticity of money demand, t is the tax rate, and mpc is the
marginal propensity to consume.
a. Derive the equation for aggregate demand.
b. Is the aggregate demand curve upward or downward sloping?
*2. Continuing from the above problem,
a. How does an increase in M/P shift the aggregate
demand curve?
b. How do increases in G and declines in transfers
shift the aggregate demand curve?

WEB EXERCISES

1. As this book goes to press, the Canadian economy
was in a recession with an increasing unemployment
rate. Go to www.bankofcanada.ca and follow the
link to employment statistics. What has happened to
the unemployment rate since the last reported figure
in Table 24-5?

2. As the CPI inflation rate in Canada fell close to 1%
at the beginning of 2009, Bank of Canada policymakers were beginning to be concerned about
deflation. Go to www.bankofcanada.ca, and follow the link to the inflation statistics.
a. What has happened to the inflation rate since
then?
b. Does deflation still appear to be a threat?

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