Consider the Canadian Economy in long-run equilibrium. A sudden pandemic has caused an unexpected drop in the level of sales. Additionally, a relatively larger impact has been in limiting supply chains and the ability of firms to produce.

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.

c.Discuss how the government could use fiscal policy to bring the Canadian economy back to its long run equilibrium. Be sure to discuss the costs and benefits of this policy.

Discuss how the economy would naturally adjust back to equilibrium. Be sure to discuss the costs and benefits of allowing natural adjustment.