1. Assume that the economy of Canada is currently at equilibrium. To cover increased healthcare costs, the government increases spending.

(a) How will the increase in government expenditures affect each of the following in the short run?

(i) Aggregate demand

(ii) Short-run aggregate supply

(b) Using a correctly labeled graph of aggregate demand and aggregate supply, show the effect of the increase in government expenditures on real output and the price level.

(c) Assume that the government funded this increase in expenditure by borrowing from the public. Using a correctly labeled graph of the loanable-funds market, show the effect of the increase in government borrowing on the real interest rate.