In this question, we assume Canada is a closed economy and is in its long-run equilibrium. TransCanada announced that they will not proceed with the East Energy pipeline in October 2017.
a) According to the long-run classical model, what happens to the equilibrium levels of output, real interest rate, and investment in Canada after TransCanada made this announcement? What happens to the real wage in Canada? Explain your answer with the aid of TWOdiagrams – one for the loanable funds market and one for the labour market. (10 points)
b) (Continued from part a) As time passes (i.e., in the very long run which will be 10-15 years from now), what happens to the stocks of productive inputs in Canada? How would this change in the stocks of productive inputs affect the equilibrium levels of output and real interest rate in Canada? What happens to the real wage in Canada? Explain, and support your answer by a new set of loanable funds market and one for the labour market diagrams (15 points)
