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The assignment talks about Effect of COVID – 19 on Canadian Economy. Also, there is a description of Solving Statistics Problems. So, what is the intuition behind the income and substitution effects that you have found?

## Effect of COVID – 19 on Canadian Economy – Solving Statistics Problems

Firstly, consider a variant of the two-period model of consumption-saving behavior. In this version of the model, the consumer has income y in the first period and no income in the second period. Her life-time budget constraint is. Secondly, draw this budget constraint in a diagram with c on horizontal axis and con vertical axis. Also, what are the slope and vertical intercept of this budget constraint? Label the endowment point in the diagram. Thirdly, suppose the consumer faces the above budget constraint and has regular, convex indifference curves. If the interest rate increases, show in a diagram how her equilibrium will change. In the same diagram, decompose the overall effect on cinto income and substitution effects. (3 points)

#### Effect of COVID – 19 on Canadian Economy – Solving Statistics Problems

Suppose the consumer faces the above budget constraint and has L-shaped indifference curves. She prefers to have the same consumption in the two periods. If the interest rate increases, show in a diagram how her equilibrium will change. In the same diagram, decompose the overall effect on cinto income and substitution effects. What is the intuition behind the income and substitution effects that you have found? The Coronavirus pandemic is likely to affect the Canadian economy in a number of ways. For this problem, assume that it has the following three effects on the Canadian economy: 1) Autonomous consumption and investment decrease; 2) the world interest rate decreases; and 3) there is a temporary decline in productivity.

#### Effect of COVID – 19 on Canadian Economy – Solving Statistics Problems

Use the small-open-economy monetary intertemporal model to study the effects of these shocks on the Canadian economy, which has a flexible exchange rate. Assume that the demand-side shock to consumption and investment is larger than the supply-side shock due to lower productivity. Also assume that the drop in the world interest rate is greater than the drop implied by the initial shifts in the output-demand and output-supply curves. Draw all five inter-connected diagrams and provide a brief explanation for changes in each diagram.

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