Suppose Canada is a closed economy and in its long-run equilibrium initially. Recent economic data shows that the stock of national debt has increased drastically due to the Canadian government providing emergency relief funds to households in attempt to mitigate the adverse effects of the Covid-19 lockdown. At the same time, the government grants the approval to one of the pharmaceutical companies to building of vaccine manufacturing plants in Canada.

a) In the context of the long-run classical model, examine the effects of the above events on the following variables in the long run: output, real interest rate, national savings, real rental price of capital, and real wages. Explain your answer with the aid of THREE diagrams - one for the loanable funds market, one for the labour market, and one for the rental market for capital. (20 points)

b) Continued from part (a) and consider what happens to the economy in the very long-run. What happens to the stock of the capital in the very long-run? Use the long-run classical model to examine the effects on output and real interest rate in the very long-run. Explain your answer with the aid of a NEW diagram for loanable funds market. (10 points)