Suppose the Bank of Canada Has Just Learned That Some

question 88

Essay

Suppose the Bank of Canada has just learned that some foreign economies are headed for recession,which will reduce Canadian exports.This is an economic shock that shifts the IS curve down.What would you do in response to the shock if you want to keep the economy at full-employment equilibrium under each of the following cases?
a.You use the classical (RBC)model.
b.You use the Keynesian (efficiency wage)model.
c.You use the extended classical model with misperceptions.
In each case,show the IS-LM-FE diagram associated with your answer.

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Definitions:

Set Point

A theory suggesting that the body maintains its weight and body fat level with internal regulatory controls.

Leptin

A hormone produced mainly by fat cells that helps to regulate energy balance by inhibiting hunger, thereby influencing appetite and body weight.

Anorexia Nervosa

An eating disorder characterized by an overwhelming, irrational fear of gaining weight or becoming fat, compulsive dieting to the point of self-starvation, and excessive weight loss.

Bulimia

An eating disorder characterized by episodes of binge eating followed by methods to prevent weight gain, such as vomiting, fasting, or excessive exercise.