Class - Mar. 17, 2026

Canadian Economic Updates

• February Labour Force Survey (March 13th)
  • Employment down by 84,000
  • Unemployment rate up to 6.7%
  • Hourly wages up 3.9% year over year
  • Youth unemployment rate in Ontario up to 15.9% (up from 14.4% a year ago)
    • Aged 15-19: up from 20% to 26.1%
    • Aged 20-24: down from 11.9% to 11.6%
• February Consumer Price Index (March 16th)
  • Headline inflation - 1.8% down from 2.2%
  • Base year effects still counting in food from restaurants

Canadian Debt Statistics

• Q4 Financial Data released today (March 17)
• Rising Canadian debt levels - household debt/disposable income
  • 94% in 1992 to 177% today (last 10 years are flat)
    • Last 10 years has been pretty flat
  • This is a weird comparison because you don't intend to pay off your entire mortgage this year
• Rising assets levels as well - net worth/disposable income
  • 543% in 1992 to 1,006% today
• Debt to total assets constant
  • 15% in 1992 to 15% in 2025 (high of 19% in 2010)
• Therefore, whenever you say that households are worse off, is just not true.

Macroeconomics Models

• IS-MP-PC model is important and we use it regularly
  • Really good at understanding short-run effects
  • How does monetary policy respond and how does fiscal policy respond?
  • However, thinking about more than a few months, what happens next?
    • Or, for example, if productivity increase happens, that doesn't show up as an increase in GDP in IS-MP-PC model
• Aggregate Demand/Supply
  • Better at long-run transition
    
    Where Y* is potential GDP

Long-Run Goals of Economic Policy

• Monetary policy is basically entirely on short-run
• Long-run goals:
  • Income, GDP per capita
  • Productivity (GDP per worker)
  • Equality
  • Education
    • Health-care
  • Something else?
    Solow-model:
• Increasing one might decrease the other

Issues in Long-Run Economic Policy

• Long-run economic growth - Solow model
  • Technology, physical capital, human capital, labour
  • Encouraging each element requires different policy
    • If you want to spend more money on education, then human capital increases, but what is the consequence of doing that?
      • That might mean less investment and lower physical capital
• Optimal size of government
  • Public vs. private mix of each element
    • Within education, there's a mix -> primary school is essentially all public, university if about half and half
    • Technology is a weird mix of companies pursing R & D on their products
      • However, there is also publicly funded educations that do research that might support technology for those companies
  • Implications for inequality

Crowding Out

Government

• Does government spending crowd out private investment?
  • Short-run?
  • Long-run?
• Y = C + I + G + NX
• If government spending goes up
• Consumption, Investment, Net exports go down

IS-MP-MC Model

Loanable Funds Model

Automatic Fiscal Stabilizers

• Discretionary policy can be far too slow
• Automatic stabilizers are critical
  • Progressive tax rates
    • If people earn more money, Gov Can collects more taxes, economy slows a little bit and automatically shifts curves
  • Employment insurance system
• Modeling automatic stabilizers
  • Reduces multiplier effects
  • Limit shifts in IS or AD curves

Timing Discretionary Economic Policy

• Ex. Laz building, World Cup and Olympics
• Can World Cup save Canada from a recession?
  • Far too small, so no
  • Multiplier effects suggest effect on GDP far less than $5 billion
  • Normally - impossible to time events to economic outcomes
  • 2010 Olympics were well-times (by accident)

Class - Mar. 19, 2026

AD/AS Framework

Shifts in Aggregate Demand

• IS curve shifts plus MP curve shifts
• Consumption
  • Wealth, taxes and transfers, confidence
• Investment
  • Confidence, corporate taxes risk premium
    • Looking back 20 years, an IS-MP model did not exist in first year, but then the financial crisis happened
• Government purchases
• Net exports
  • Global growth, exchange rates, etc.
• NOTE: We don't care about the slope of the AD curve, just know it's negative

Aggregate Supply

• Much more political and contested
• How much do companies produce?
  • Companies raise prices when output increases
• Aggregate supply is upward sloping
  • Represents how much we produce in the economy
  • Represents output-gap inflation
  • Costs rise when producing more
  • Companies with market power raise prices when sales increase

Aggregate Supply Shifts

• Why does the AS curve shift?
  • Same reasons that the Phillips curve shifts
• Supply shocks
  • Higher costs are negative supply shocks
    • Shift AS curve to the left
    • Like higher price of oil
  • Input prices (including wages)
  • Productivity
  • Exchange rates
    • Depreciation of the Canadian dollars creates a shift to the left

Macroeconomic Equilibrium

• Equilibrium income and prices when AD=AS
• When AD or AS shift, output changes and price change
• Interpret higher price level as inflation
• Think about changes in output relative to the output gap

Monetary and Fiscal Policy

In general, monetary policy comes first

• Monetary policy - interest rates and the money supply
  • Bank of Canada changes interest rates for two reasons
    • Controlling inflation (may be built into the AD curve)
    • Maintaining output and employment
    • Lower than expected interest rates are expansionary monetary policy
• Fiscal policy
  • Government of Canada controls fiscal policy
    • Tax rates, transfers to households, government purchases
    • Higher spending or lower taxes - expansionary fiscal policy

Multiplier Effect

• If government spends money, how much does GDP change?
  • Measure in the multiplier effect
  • Change in output = change in spending times multiplier
  • $$\mathrm{\Delta }Y=\mathrm{\Delta }G\times m$$
  • Where G is the government spending and m is the multiplier
• How big is the multiplier?
  • Roughly between 0.5 and 1.5
    • How can it be less than 1? You have to look to its constraints
    • The way your AS looks (its shape aka its slope)
  • Lots of factors matter
    • Tax rates, imports, MPC

IS-MP-PC vs. AD-AS: Rise in Exports

IS-MP-PC vs. AD/AS: Supply Shocks

Slope of the Aggregate Supply Curve

• What is the slope of the aggregate supply curve? And is it a straight line?
• Many versions imply an increasing slope
• The idea: there's a range roughly around zero output gap (aka at Potential GDP). If we're at a recession, then it's fairly flat, whereas if we're at a positive output gap, then the curve is pretty steep
• Implications
  • Prices drop slowly in recessions but rise quickly in expansions
  • GDP falls more in recessions than it rises in expansion
  • Multiplier depends on economic conditions