1.Consider the Canadian Economy in long-run equilibrium. A sudden decrease in the price of oil causes the price of gasoline and energy (inputs) to fall.

a.Graph the impact of this shock on the Canadian Economy, State whether the Canadian economy is in an expansionary or recessionary output gap following this shock.

b.Would we expect to witness an observed unemployment rate higher or lower than the natural unemployment rate following this shock? Briefly discuss why.

Explain, fully, how the economy would naturally adjust back to equilibrium