USA is a primary exporter of Canadian goods. There is a "boom" in the US economy, increasing incomes of Americans so they are able to buy more Canadian goods (i.e. Canadian exports go up).

Use the AS-AD model to demonstrate the impacts on the Canadian economy in terms of GDP, inflation and unemployment change.Mention what kind of output gap will get created.

(hint: your AS-AD model should have three curves- the AD curve, the SRAS curve and the LRAS/potential GDP line. Start with the economy at a position where actual GDP equals potential GDP; then find the new short run equilibrium in the model given the change).

Discuss the natural adjustment process through which the economy can go back to the potential GDP in the long run.