a) A wave of pessimism engulfs Canada. Use the Aggregate Demand Aggregate Supply model to show, graphically, the effect on economic activity. How would the economy return to the long-run equilibrium without government or central bank intervention? Show graphically. Explain in words why you are shifting curve(s).

b) As in a), a wave of pessimism engulfs Canada. But this time, the government wants to prevent a recession. Which policy could the government implement? Show graphically the effect of the government response you propose.