CIA4U1 St. Roch C.S.S J. Sicoli Application 22 marks 1. Suppose the Canadian economy is experiencing high inflation. The GDP is at $900 billion, while full- employment GDP is $800 billion. a) Draw a freehand, properly labelled, aggregate demand and aggregate supply diagram to illustrate the inflationary gap that exists. (3 marks) b) What other type of fiscal policy might be considered instead of (or might be used along with) reduced government spending? Briefly describe the effects upon aggregate demand that the government would hope such a policy would have. (2 marks) c) What action would the Bank of Canada take with the overnight rate to support the fiscal policies above? Briefly describe the effects upon aggregate demand that such a monetary policy would have. (2 marks) Page 3 of 6