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Chapter 11: Q. 12 (page 252)

Consider an open economy in which the aggregate supply curve slopes upward in the short run. Firms in this nation do not import raw materials or any other productive inputs from abroad, but foreign residents purchase many of the nation's goods and services. What is the most likely short run effect on this nation's economy if there is a significant downturn in economic activity in other nations around the world?

Short Answer

Expert verified

Because of the decrease in aggregate demand, the short-run aggregate curve shifts to the right, establishing a new short-run equilibrium. Income spending falls as a result of lower foreign income, resulting in a shift to the left in the aggregate demand curve.

Step by step solution

01

Step 1:keynesian theory

Unemployment: Keynesian Theory accepts the fact that there is unemployment; the economy cannot operate in Full Employment Mode all of the time; it is only possible for a limited time. Government's Role: Keynesian Theory recognizes that the government must sometimes intervene to control/regulate the economy.

02

Step 2:short run effect on this nation's economy 

Because of the decrease in aggregate demand, the short-run aggregate curve shifts to the right, establishing a new short-run equilibrium. Income spending falls as a result of lower foreign income, resulting in a shift to the left in the aggregate demand curve..

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Most popular questions from this chapter

Consider Figure 11-3. Will all people who desire to work be employed if the current wage rate is $28per hour? How many people will be employed and unemployed at this wage rate?

Between carly 2008 and the beginning of 2009 , a gradual stock-market downturn and plummeting home prices generated a substantial reduction in U.S. household wealth that induced most U.S. residents to reduce their planned real spending at any given price level. Explain, from a short-run Keynesian perspective, the predicted effects of this event on the equilibrium U.S. price level and equilibrium U.S. real GDP. Be sure to discuss the spending gap that the Keynesian model indicates would result in the short run.

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Consider a country with an economic structure consistent with the assumptions of the classical model. Suppose that businesses in this nation suddenly anticipate higher future profitability from investments they undertake today. Explain whether or how this could affect the following:

aThe current equilibrium interest rate

bCurrent equilibrium real GDP

cCurrent equilibrium employment

dCurrent equilibrium saving

eFuture equilibrium realGDP

What determines how much real GDP responds to changes in the price level along the short-run aggregate supply curve?
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