1. Suppose that your economy is in long run equilibrium, then the following shock occurred. The aggregate demand and aggregate supply in the market is represented by the following:

What should the Bank of Canada do to close the gap? State whether you think it will be A, B, C, D, E, F, G, H, I , J and/or K . In your answer only include the letter. Put all choices that could apply. If you think it is ACD you can put both letters (put in alphabetical order!).

A. Increase taxes B. Decrease taxes E. Decrease Price of Bonds F. Increase Price of Bonds

G. Increase the reserve ratio H. Decrease the Reserve Ratio I. Increase Bank Rate

J. Decrease Bank Rate. K. Nothing

\fA B C D LRAS AS LRAS AS1 LRAS AS1 AS2 AS1 AS1 AD1 AD1 AD2 ADADI E F G H LRz LR1 AS. $ LR, LRz ASI LRAS LRAS AS1 AS1 AS1 AS2 D AD1 ADT AD2 AD2 AD1 Q Q Figure (AD/AS) in the short run