1.Suppose that consumers become pessimistic about the future outlook of the Canadian economy, and so cut back on their consumption spending. What will happen to aggregate demand and to output? What might the executive and the parliament have to do to keep output stable?

2.Explain how an increase in the price level changes interest rates. How does this change in interest rates lead to changes in investment and net exports?

3.Suppose a bottle of wine costs 25 euros in Spain and 20 dollars in Canada. If the exchange rate is 1.25 euros per dollar, what is the real exchange rate?

4.Assuming all other things equal, what would happen to the Canadian dollar real exchange rate under each of the following circumstances?

a.The Canadian nominal exchange rate depreciates.

b.Canadian domestic prices increase.

c.Prices in the rest of the world rise.