For the following events, explain the short-run and long-run effects on output and the price level, assuming policymakers take no action. You need to draw the AD-SRAS-LRAS diagram for the Canadian economy, starting in a long-run equilibrium. Make sure to illustrate its effect using a well-labeled diagram.

Assume that there is a large increase in demand for Canadian exports. Show the resulting short-run equilibrium on your graph. In this short-run equilibrium, is the unemployment rate likely to be higher or lower than it was before the increase in exports? Explain it.

Explain how the economy adjusts back to long-run equilibrium. When the economy has adjusted back to long-run equilibrium, how would the values of each of the following have changed relative to what they were before the increase in exports?

a.Real GDP

b.The price level (CPI)

c.The unemployment rate