Recession In Canadian Economy

Improved Essays
Canadian economy enters recession

Canada has entered recession due to a fall in the price of US crude oil, which has contributed to a lower demand for oil produced in Canada, therefore leading to a decrease in exports and thus a fall in real GDP. The Canadian economy has a negative growth and a contraction of 0.8% and hence indicating a recession.
A recession occurs due to a period of a decline of GDP and consequently leading to an increase in unemployment. This occurs in the contraction zone of the business cycle. A recessionary gap arises due to insufficient aggregate demand, as shown in Diagram 1, where the output produced is lower than the potential output Yp.
In order for the Canadian economy to close the recessionary gap it can enforce
…show more content…
This might have different effects on the AS and SRAS curve, since a rightward shift in the monetarist (SRAS) curve would lead to a smaller increase in GDP and a larger increase in price level compared to the Keynes (AS) curve, which will have a large increase in GDP and a smaller or no increase in price level if in the horizontal section.
However, the expansionary monetary policy might not be as effective due to time lags, time needed to recognize and time for the policy to take place. Also, it might not be as effective in a deep recession, because in a severe recession banks might be unwilling to increase their lending due to fear that borrowers might not be able to pay the loans
…show more content…
There are three types of tax cuts, lowering personal income tax, lowering taxes on capital gain, and lowering business taxes. Cuts in personal income taxes and business taxes will lead to a higher- after tax income and higher-after tax profits, therefore creating the incentive for workers to work more, and businesses to invest more. For example, an increase in the number of hours worked per week or month or business pursuing more in R&D. This will lead to a shift of the AD curve from AD1 to AD2 and a shift of the LRAS curve from LRAS1 to LRAS2 as shown in Diagram 3. This will result in increasing long- term economic growth, increase in potential output and reducing the amount of unemployment, leading Canada out of recession. However, tax cuts might not be as effective, because workers may decide to use their higher-after tax income to consume more rather than save, which then would not affect savings and investment. Furthermore, tax cuts will also have a negative effect on the government budget, because tax cuts are reducing government

Related Documents

  • Improved Essays

    This essentially means borrowers are paid and savers are penalized. This tactic is used to get consumers to spend more and save less, however, I do not think the Fed will do this since the effect of the policy is uncertain and risky. The Fed’s main goal in coming years is not to create economic growth, but to reduce spending and inflation. The distribution gap between the wealthy and the poor has become larger in recent years, especially with the diminishing middle-class. To reduce this gap, Trump wants tax cuts to entice spending, but during uncertainty, households will be inclined to save more and spend less.…

    • 995 Words
    • 4 Pages
    Improved Essays
  • Superior Essays

    With the retirements of these baby boomers in Canada, the decreasing labour force may cause the reduction in technology development resulting in a negative productivity. Labor shortages will take a more serious issue in restricting Canadian’s economic development. “with the exit of workers from the labour force, it is extremely difficult to meet high rates of gross domestic product growth.” Based on Robert’s opinion, we can assume pessimistically that aging in the society causes an increase in unemployment. In general, older workers have less productivity than younger workers. And when the percentage of aged workers is higher than younger workers, it will directly affect the gross domestic product growth in a gentle but negative way.…

    • 1107 Words
    • 5 Pages
    Superior Essays
  • Great Essays

    The deflation leads a negative shock in aggregate demand, therefore the AD curve shifts to the left, both of the price level and real national output falls. From the above points of view, there will be an economic recession due to the falling national output. Therefore, when the price level and national output falls, as a result the unemployment rate…

    • 1183 Words
    • 5 Pages
    Great Essays
  • Improved Essays

    Therefore, the private sector will have negative outcomes, and the private sector will borrow less money. With the private sector borrowing less money and less money circulating in the economy, the unemployment rate goes up, aggregate demand decreases, and a recession may occur. The items listed before all slow down economic growth. This is another con of national debt because it affects the private sector, job security, and economic growth in bad ways. A negative of the national debt is taxes may rise in the future to produce higher revenues for the government…

    • 728 Words
    • 3 Pages
    Improved Essays
  • Improved Essays

    When there is a major imbalance in the federal and state governments expenditure and receipts it leads to a structural deficit. Therefore, this deficit makes a government keep borrowing, and this may lead to large debts. When a country spends more that they can raise there will be a deficit despite the fact that the economy is well or bad. This will make the structural deficit grow at a higher rate as compared to the economy of the country. What are the right policies to combat structural deficits?…

    • 912 Words
    • 4 Pages
    Improved Essays
  • Improved Essays

    The Canadian Economy

    • 1188 Words
    • 5 Pages

    A drop in oil prices puts Canada’s industry in a tough position because the prices are now too low to justify new profitable projects. In fact, Canada’s main source of new oil projects comes from oilsands (CITATION). Since the extracting oil from the oilsands is rather expensive, it needs the prices to be high enough for future profitability (Citation). This leads to the conclusion that investment in this industry should decrease, and…

    • 1188 Words
    • 5 Pages
    Improved Essays
  • Improved Essays

    As a result of this, real output will shift from to P to P1. A lack of disposable income will arise from the people who have lost their jobs and will therefore demand less goods and services. Moreover, this can also lead on to the knock on affect of a loss of jobs in other areas of the economy due to there being a deficient demand. The government will then as a result of this increase expenditure as capital expenditure will increase on welfare benefits, which will mean that money cannot be spent on other supply side policies, resulting in a trade of a damaging the long run growth of AS. In addition to this, public confidence will deteriorate which will also lead to a reduction in AD.…

    • 784 Words
    • 4 Pages
    Improved Essays
  • Superior Essays

    This could be in the expansionary fiscal policy, contracting fiscal policy. Expansionary fiscal policy: this is laws passed by the legislative and executive branches to increase government spending or lower taxes, which increases the money supply in an economy. For example, when taxes reduce, the government is trying to increase the level of consumers in other to help businesses and the economy. This raise would shift the aggregate demand curve to the right; therefore, a change in policy would lead to short-term fluctuations in production and prices. That is to say, the more money in the economy the more customers would buy Aveeno Eczema Therapy.…

    • 1251 Words
    • 5 Pages
    Superior Essays
  • Improved Essays

    However it also has negative impacts such as the short term effects of consumers saving rather than spending due to low confidence, and also the budget deficit may not be able to give up the high source of income that is income tax and this may impact other areas of the economy and also has negative social impacts, such as upon welfare benefits. An alternative policy, monetary, also has its positives, decreasing consumer debt and decreased inflation, it also has many negative outcomes such as increasing unemployment, reducing firm’s incentives to expand due to a lack of demand and worsening the budget deficit. Therefore, the government should use the cut in income tax to improve the economy as it has less negative side effects than the alternative discussed, also this policy is the best policy for improving the economy in the short term and in the long term, where as the alternative is far more focused upon the short term improvement, however to lessen the negative impacts on the economy the government should wait until the government budget can improve, doing this will mean the budget deficit is not worsened by an amount that could be devastating to the economy and will enable this policy to…

    • 1259 Words
    • 6 Pages
    Improved Essays
  • Superior Essays

    Inflation In Canada

    • 1208 Words
    • 5 Pages

    In fact, the government needs to consider implementing another contractionary monetary policy. This time, they should decrease the money supply in the economy. If the Bank of Canada, decreases the money supply, it will raise interest rates and will decrease the spending in the economy (pg 158). The reason why interest rates will rise when the money supply decrease is due to the fact that the money demand curve is downwards sloping. This means that as more money is taken out of the economy, the interest rate will slowly increase.…

    • 1208 Words
    • 5 Pages
    Superior Essays