would have on the Canadian economy. Short-run Equilibrium Quantity LRAS SRAS AD Price Long-run Equilibrium LRAS Quantity AD SRAS
The Correct Answer and Explanation is:
Correct Answer:
The diagrams represent a short-run equilibrium and a long-run equilibrium for the Canadian economy. In the short-run diagram (left), the intersection of the Aggregate Demand (AD) curve and the Short-Run Aggregate Supply (SRAS) curve determines the short-run equilibrium. In the long-run diagram (right), the economy adjusts so that the AD curve intersects both the SRAS and the Long-Run Aggregate Supply (LRAS) curve at the same point, representing full employment output (potential GDP).
Explanation
The graphs illustrate the dynamics of short-run and long-run macroeconomic equilibrium in the Canadian economy. The vertical LRAS curve represents the economy’s potential output—its full employment level of production—determined by factors like technology, labor, and capital.
In the short-run equilibrium (left graph), the economy is where the AD curve intersects the SRAS curve, but not necessarily at the LRAS line. This means the economy may be experiencing either an inflationary or recessionary gap. In the figure, the AD and SRAS intersect to the left of the LRAS, indicating a recessionary gap. This implies that the current output is less than potential output, often resulting from weak aggregate demand, such as during a downturn or consumer confidence decline.
In the long-run equilibrium (right graph), the economy adjusts. Wages and prices become flexible, and economic agents correct their expectations. The SRAS curve shifts (often rightward in the case of a recessionary gap) to ensure that the equilibrium output returns to potential GDP, aligning with the LRAS. This results in a new intersection point where AD = SRAS = LRAS, meaning the economy is at full employment with stable prices.
In the Canadian context, government policies—such as stimulus spending or monetary policy—can shift AD, while structural reforms can shift LRAS over time. Understanding this framework helps in evaluating economic health and policy effectiveness in achieving sustainable growth and price stability.
