1) Explain how each of the following changes will affect Aggregate Demand in Canada. A diagram isn't necessary. Only a written explanation...(2 marks each)

(a) The value of the Canadian dollar rises from $0.76 US to $0.77 US (all else equal)

(b) The Federal Government lowers income taxes (all else equal)

(c) Due to a stronger employment situation, workers expect increases in income in the near future (all else equal)

(d) There's a recession in the United States, Canada's major trading partner

2) The ice planet of "Hoth" produces only three goods: popsicles, frozen dinners and medical vaccines which must be stored at a very low temperature.

Hoth's base year is 2050 and the current year is 2060. The planet produces a constant basket of 3200 popsicles, 6500 frozen dinners and 9000 bottles of vaccine. Prices for each good are shown below for the base and current years:

Good.....................Price in base year..................Price in current year

Popsicle $3 each $5 each

Frozen dinner $5 each $6 each

Vaccine $75 each $70 each

Questions:

(a) Calculate the Consumer Price Index for Hoth in both the base year and the current year (6 marks)

(b) Calculate the inflation rate between the base year and the current year (2 marks)

(c) What does your answer in (b) tell you about Hoth's price level? Explain briefly (2 marks)