Consider the following news headline: "World commodity prices rise sharply." Choose the statement below that best describes the likely macroeconomic effects in Canada. (Remember that Canada is both a producer and a consumer of commodities.)
A)the AD curve shifts to the left and the AS curve shifts to the right; the price level falls and the effect on real GDP is indeterminate
B)there is no change in either the AD or the AS curves
C)the AD and AS curves both shift to the left; the effect on the price level is indeterminate and real GDP decreases
D)the AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP increases
E)the AD curve shifts to the right and the AS curve shifts to the left; the price level rises and the effect on real GDP is indeterminate

Question

Quizplus · Accepted Answer

Since Canada is a producer and consumer of commodities, the rise in world commodity prices will increase the demand for Canadian commodities and cause the AD curve to shift to the right. At the same time, the increase in input costs for Canadian producers will cause the AS curve to shift to the left. The overall effect on the price level is indeterminate, but it is likely to rise. The effect on real GDP is indeterminate because the increase in demand for Canadian commodities could increase production and employment, but the increase in input costs could decrease production and employment.

Consider the Following News Headline: "World Commodity Prices Rise Sharply