Question

Macroeconomics

Aggregate demand/supply

Since Brexit, the United Kingdom (UK) and the European Union (EU) have been negotiating a new relationship. The success of the UK economy in benefitting from this new relationship depends very significantly on the government of UK instilling confidence in people that this new relationship will not significantly diminish UK access to EU markets, thereby generating positive expectations about the UK's future. Why? Explain using appropriate graphs. Note there is both a domestic and an international dimension to this analysis.

Answer 1

A ‘supply shock’ shifts the AS curve to the left, lower quantity is supplied at each & every level of price along the curve. Such a shock has inflationary implications as lesser output is available for the identical sum of money around. The shock is, however, to the supplying of foreign markets only, not United Kingdom markeys. Brexit will adversely affect the United Kingdom exports. This is anticipated to affect the currency and not the United Kingdom economy as such. This shock would imply lower Great Britain Pound demand & the subsequent decline in the currency.

The decline in the currency would then partly offset the affect as inexpensive United Kingdom's production would attract other foreigners, including EU ones, to purchase UK commodities, shifting the Aggregate Demand curve to the right. How much so relies on the elasticity of the foreign demand

The probable supply shock from Brexit will also be contingent upon the deal with the European Union & the agreements with the RoW now being negotiated autonomously of the EU. Several nations thrive external to the EU, so why won't the United Kingdom? This optimism could be visualized as the Aggregate Supply curve shifting right in the short-run. In the long-term the Aggregate Supply curve is normally considered almost vertical, so Brexit may not actually modify the RGDP level but would have increased the level of prices. So far as the European Union was holding back United Kingdom's productivity the Aggregate Supply curve may certainly move to the right, reducing the price level & raising RGDP.