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Questions are attached as below: Suppose the economy of Canada has reached the long run equilibrium (i.e. full employment) and assume that the function of

Questions are attached as below:

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Suppose the economy of Canada has reached the long run equilibrium (i.e. full employment) and assume that the function of exports and imports are as follows: EX = are + oslql 0:20\" T'\") (1) IMP=50 ;31q+;32(YT) (2) where q is the real exchange rate between Canadian and US goods, YT is the Canadian disposable income, 3\" T* is the US disposable income, and the 05's and the ,8's are positive parameters. Assume that Prime Minister Trudeau decides to implements a temporary policy that convinces Canadians to buy less imported goods at any given real exchange rate and any given level of disposable income. In particular, assume that this policy lowers 50 in the imports function shown above. a Explain how this temporary shock affect the level of output, consumption, investment, government expenditure, the nominal interest rate, the nominal and real exchange rates, and the level of prices in the short run. Use a the AADD model to answer this question and do not forget to use a diagram to support your answer. [5 points] b Explain what type of monetary policy, contractionary or expansionary, does the Central Bank have to implement to move the economy back to the full employment (i.e., the initial equilibrium)? Support your answer with a graph of the AA-DD model. [10 points]

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