Question

Use the ADAS model to explain the likely short run impacts on U.S. GDP and the aggregate price level. What do you anticipate to happen to U.S. consumption expenditures and U.S. employment? Explain your reasoning for each of your predictions and show graphically as appropriate.

Answer 1

Change: A decrease in the demand for U.S. exports.

The aggregate demand in the economy is the sum of consumption expenditure, investment expenditure, government expenditure and Net exports in the economy. A decrease in the demand for U.S. exports will reduce the value of exports by the United States and this reduction in the value of exports will reduce net exports of the U.S. A decrease in the net exports will reduce the level of aggregate demand in the economy and this will shift the AD curve leftwards in the AD-AS model where intial equilibrium occurs at point E1. AT new equilibrium point E2, both the price level and real GDP in the economy has decreased and economy is in the recessionary gap. During recession, income decreases and this decreases the level of consumption expenditure in the economy. production is also below potential level which reduces demand for labor in labor market and this increases unemployment in the economy.

Thus, decrease in US exports reduces price level and real GDP in the economy.