Macroeconomic adjustment processes

Simulations of the Canadian quarterly model RDX2 are used to illustrate the main macroeconomic adjustment processes called into play by an exogenous expenditure shock. Primary emphasis is placed on supply responses, including international flows of goods, services, capital and population, and on the key role played by inventory changes in buffering discrepancies between ex ante supply and demand. The constraining roles of prices, wages, and monetary policy are also dissected in some detail.