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Chapter 24: Q. 37 (page 602)

What are some of the ways in which exports and imports can affect the AD/AS model?

Short Answer

Expert verified

The change in exports and imports shifts the aggregate demand curve only in the AD/AS framework. An increase in net exports will shift the AD curve to the right.

Step by step solution

01

Step 1. Ways which affect the AD/AS model 

The aggregate demand contains both exports and imports. Thus, only under the AD-AS framework can changes in exports and imports cause the aggregate demand curve to shift.

Assume that exports exceed imports, resulting in an increase in net exports for the economy. Increased net exports will cause the AD curve to move to the right, resulting in a rise in output and price.

02

Step 2. Explanation

When seen in the diagram below, the AD curve shifts from AD0 to AD1 as net exports increase. The output level increases from Y0 to Y1, and E1 becomes the new equilibrium point. However, the new equilibrium is still a long way from full employment or potential GDP.

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Most popular questions from this chapter

During spring 2016the Midwestern United States, which has a large agricultural base, experiences above-average rainfall. Using the AD/AS diagram, what is the effect on output, the price level, and employment?

Would a shift of AD to the right tend to make the equilibrium quantity and price level higher or lower? What about a shift of AD to the left?

The imaginary country of Harris Island has the

aggregate supply and aggregate demand curves as Table 24.3shows.

a. Plot the AD/AS diagram. Identify the equilibrium.

b. Would you expect unemployment in this economy to be relatively high or low?

c. Would you expect concern about inflation in this

economy to be relatively high or low?

d. Imagine that consumers begin to lose confidence about the state of the economy, and so AD becomes lower by 275at every price level.

Identify the new aggregate equilibrium.

e. How will the shift in AD affect the original

output, price level, and employment?

Hydraulic fracturing (fracking) has the potential to significantly increase the amount of natural gas produced in the United States. If a large percentage of factories and utility companies use natural gas, what will happen to output, the price level, and employment as fracking becomes more widely used?

Suppose concerns about the size of the federal budget deficit led the U.S. Congress to cut all funding for research and development for ten years. Assuming this has an impact on technology growth, what does the AD/AS model predict would be the likely effect on equilibrium GDP and the price level?
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