How the central bank of canada can use monetary policy

Reference no: EM132198884

Question: Negative Shock to the Aggregate Demand, Monetary and Fiscal Policy. Suppose Canada has reached the long run equilibrium (i.e. full employment). Suddenly Canadian Investors become less optimistic about economic conditions and reduce temporarily their total investment in Canada.

a) Use the AA-DD and the Keynesian Cross Models to explain what would happen to the exchange rate and output in the short run after the shock (recall that Canada reached its full employment level before the shock). Support your answer with a graph of the AA-DD model and the Keynesian cross and explain carefully.

b) Monetary Policy to Maintain Full Employment. Using your answer in part (a), explain how the Central Bank of Canada can use monetary policy to restore full employment after the shock. Support your answer with a graph of the AA-DD model and explain carefully.

Reference no: EM132198884

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