Final answer:
C.The price level will rise, and real GDP might rise, full, or stay the same In the short run, Canadian GDP remains unchanged, but the price level increases in response
Step-by-step explanation:
If the Canadian economy is in long-run equilibrium and then the value of the Canadian dollar falls while Canadians revise their expectations so that the expected price level increases, what will happen in the short run? According to the theory of rational expectations and the flexibility of the price level, there will be no change in real GDP in the short run. Instead, the short-run aggregate supply curve (SRAS) shifts to accommodate the expected higher prices, leading to a new equilibrium at the higher price level without changing real GDP. This is because in the long run, the economy operates at its potential GDP and output is not affected by shifts in aggregate demand. The new equilibrium will merely reflect the adjustment in nominal wages and prices to the anticipated new price level.
n the short run, a revision in expectations of the price level in Canada can have an impact on both real GDP and the price level. If people revise their expectations to anticipate a higher price level, it can lead to an increase in real GDP and the price level. So option C is the correct answer. The price level will rise, and real GDP might rise, fall, or stay the same.