Question

These questions relate to the US-China trade war:  

1. Identify 2 factors, either aggregate demand or aggregate supply factors, that the US actions are intended to affect.
2. Explain these factors and their intended impact on US RGDP, unemployment and the price level. For AS factors indicate whether they are long-run or short-run AS factors or both.
3. Draw a AD-AS diagram to illustrate your answer.

Answer 1

US- China trade war is mainly tariff(tax on imports) war. USA to encourage domestic production is reducing taxes and also putting tariff on Chinese products claiming that China dumps its products in USA and also keeps Yuan devalued to increase exports. China also retaliated by putting more tariff on USA goods.

US actions affect Aggregate demand(AD) in following ways: Less choices for consumers and as prices of USA made goods is higher contraction in aggregate demand.

US actions affect Aggregate supply (AS) in following ways: Increase supply of USA producers but at higher prices. As costs of production goes up many businesses passing this cost burden on consumers and indirectly demand is low and also wages in USA are higher. Many producers are complaining of higher costs and reduced profits in future which may result in higher unemployments. However, it is true that USA is having veery low unemployments currently and a growth rate is also good. Reasons for this can be aftereffects of expansionary fiscal and monetary policy in the past to keep interest rates low and low taxes along with more government spending.

In the long run, aggregate demand in USA economy will contract due to higher prices and suppliers will also reduce aggregate supply resulting in more jobs being lost. Free trade is better.

As shown in the figure, average price levels will go up from P1 to P2 in the short run, making less GDP. in the long run producers will produce less and US GDP will go from Y1 to Y2 and again recessionary gap will be there with more unemployment.