The following graph shows the aggregate demand (AD) and aggregate supply (AS) curves for a hypothetical economy. Initially, the economy is operating at its full-employment level. Use the graph to help you answer the questions that follow. You can drag the curves on the graph to help you answer the questions, but you will not be scored on any changes you make to the graph. Suppose the government increases tax rates without changing its spending. Demand Supply 0 1 2 3 4 5 6 7 8 9 10 11 12 300 275 250 225 200 175 150 125 100 75 50 25 0 PRICE LEVEL REAL GDP (Billions of dollars) Demand Supply In the short run, the price level will be , and real gross domestic product (GDP) will be $ billion. In the long run, the price level will be , and real GDP will be $ billion. Assume that the economy is still in short-run equilibrium following the increase in taxes. In order to bring the economy back to its full-employment level, the central bank can the money supply, which leads to a shift in the aggregate curve. Why is it difficult for the Bank of Canada to

billion. In the long run, the price level will be @ In the short run, the price level will be . and real gross domestic product [GDP) will be . @nd real GDP will be billion. ) Assume that the econemy is still in short-run equilibrium following the increase in taxes, In order to bring the economy back to its full-employment level, the central bank can [ZEget? w the money supply, which leads to a shift in the aggregate demand W curve. Why iz it difficult for the Bank of Canada to shift the aggregate demand curve precisely? Check 2l that zpply. [ Data zbout the state of the economy are not available in real time, O The Bank of Canada does not lend te banks and financial institutions. [0 The Bank of Canada does not fully control the money supply. Economists debate whether monetary policy should be made by discretion or implemented according to a predetermined set of rules. with which of the following statements z2re 2dvocates of discretion liksly to agree? The Bank of Canada iz likely to make a lot of mistakes when trying to adjust to aggregate demand shocks. The Bank of Canada should not try te adjust to every aggregate demand shock. On average, the Bank of Canada's adjustments to aggregate demand shocks push the economy in the right direction. 6. Challenges for monetary policy The following graph shows the aggregate demand [AD) and aggregate supply (AS) curves for a hypothetical economy. Initially, the economy is operating at its full-employment level. Use the graph to help you answer the questions that follow. You can drag the curves on the graph to help you answer the questions, but you will not be scored on any changes you make to the graph. Suppose the government increases tax rates without changing its spending. S - (-\\)I 30 75 / O . S =50 oy Darrand 25 O 0 g 175 Sueply = 130 w = E i = o1 2 3 4 &5 & T B 8 W0 1 12 REAL GDP (Billions of dollars) billion. In the lang run, the price level will be @ . and real gross domestic product (GDP) will be billion. In the short run, the price level [ 1. and real GOP will be Assume that the econemy is still in short-run equilibrium following the increase in taxes. In order to bring the economy back to its full-employment level, the central bank can [IZEget" w the money supply. which leads to a shift in the aggregate demand curve