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Chapter 11: Q. 8 (page 291)

Suppose Mexico, one of our largest trading partners and purchaser of a large quantity of our exports, goes into a recession. Use the AD/AS model to determine the likely impact on our equilibrium GDP and price level.

Short Answer

Expert verified

The aggregate demand鈥揳ggregate supply model, also known as the AD鈥揂S model, is a macroeconomic model that explains price levels and production by examining the link between aggregate demand (AD) and aggregate supply (AS).

Step by step solution

01

Concept introduction

The total quantity of products and services demanded by consumers at a given price level and period is known as aggregate demand.

The value of total production produced by an economy at a certain price level over a specific time period is known as aggregate supply.

02

Explanation

As Mexico is now in a recession, it will stop importing goods from the United States. As a result of the drop in US exports, aggregate demand will drop. This is because aggregate demand includes both exports and imports.

The AD curve will shift leftward due to a decrease in net exports.

This will result in a drop in Real GDP and the price level at equilibrium.

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Most popular questions from this chapter

If new government regulations require firms to use a cleaner technology that is also less efficient than what they previously used, what would the effect be on output, the price level, and employment using the AD/ AS diagram?

Suppose the U.S. Congress passes significant immigration reform that makes it more difficult for foreigners to come to the United States to work. Use the AD/AS model to explain how this would affect the equilibrium level of GDP and the price level.

If households decide to save a larger portion of their income, what effect would this have on the output, employment, and price level in the short run? What about the long run?

The imaginary country of Harris Island has the aggregate supply and aggregate demand curves as Table 11.3 shows.

Price Level
AD
AS
100
700
200
120
600
325
140
500
500
160
400
570
180
300
620

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 275 at every price level. Identify the new aggregate equilibrium.

e. How will the shift in AD affect the original output, price level, and employment?

Economists expect that as the labor market continues to tighten going into the latter part of 2015 that workers should begin to expect wage increases in 2015 and 2016. Assuming this occurs and it was the only development in the labor market that year, how would this affect the AS curve? What if it was also accompanied by an increase in worker productivity?
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