Imagine That an Economy Experiences a Long-Lasting Banking Crisis and That

question 122

Essay

Imagine that an economy experiences a long-lasting banking crisis and that subsequently consumption growth permanently falls. Using the AD-AS model, draw a diagram and explain the effects of the permanent decline in consumption growth on the inflation rate and the real growth rate in both the short run and the long run.

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Definitions:

CCA Class

Categories within the Capital Cost Allowance system that group assets with similar useful lives for the purpose of depreciation.

Resale Value

The estimated market value of an asset at the end of its useful life or lease term.

Depreciation Tax Shield

The reduction in income tax expense that results from the depreciation expense on capital assets, allowing companies to save money on taxes.

Marginal Tax Rates

The rate of tax applied to the last dollar of income, which can vary depending on the income level and filing status of an individual or entity.