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Chapter 11: Q.37 (page 292)

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

Short Answer

Expert verified

Price levels and Real GDP both rise as a result of the rightward shift.

Step by step solution

01

Introduction 

Exports- Goods and services produced in one country and sold to buyers in another are known as exports.

Import- An import is a product or service purchased in one country but made in another.

02

Explanation

Aggregate demand includes both exports and imports. Net Exports, or the difference between exports and imports, is a component of foreign commerce in an economy.

As exports or imports rise or fall, AD rises, pushing the AD curve to the right.

The aggregate demand curve shifts rightward from AD0 to AD1 in the diagram above. Price levels and Real GDP both rise as a result of the rightward shift. However, the new equilibrium is still a long way from potential GDP or full employment output levels.

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Most popular questions from this chapter

What is the economic reason why the SRAS curve slopes up?

What is potential GDP?

Briefly explain the reason for the near-horizontal shape of the SRAS curve on its far left.

Suppose the level of structural unemployment increases. How would you illustrate the increase in structural unemployment in the AD/AS model? Hint: How does structural unemployment affect potential GDP?

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.
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