1. The Canadian consumer confidence rebounded sharply in September 2012. This is a significant rebound since the plunge in October 2008. According to some analysts, the good news from Europe and the jump in the stock market appears to have had an effect on Canadian consumer confidence.

(10 marks)

a. Explain the various factors that buoyed Canadian consumer confidence in 2012.

(2 marks)

b. Explain and draw a graph to illustrate how a rise in consumer confidence can change real GDP and the price level in the short run.

(2 marks)

c. If the economy was operating at full-employment equilibrium, describe the state of equilibrium after the increase in consumer confidence. In what way might consumer expectations have a self-fulfilling prophecy?

(2 marks)

d. Why do changes in consumer spending play such a large role in the business cycle?

(2 marks)

e. Explain how the economy can adjust in the long run to restore full-employment equilibrium. Draw a graph to illustrate this adjustment process.