Suppose You Are an Economist Working for the Bank of Canada

Essay

Suppose you are an economist working for the Bank of Canada when droughts in Ontario and floods in Manitoba substantially reduce food production in Canada. Use the aggregate demand-aggregate supply model to illustrate graphically your policy recommendation to accommodate this adverse supply shock, assuming that your top priority is maintaining full employment in the economy. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the terminal equilibrium values. State in words what happens to prices and output as a combined result of the supply shock and the recommended Bank of Canada accommodation.