Question

In this assignment you will apply your knowledge and understanding of the AD/AS model to a hypothetical scenario.

Write a response to the following scenario on a word file or equivalent and submit it as an 'upload file'. Please note you can only submit the following file types, doc, docx, pdf, txt, png, and jpeg. Graphs can be hand-drawn or computer graphics. Remember to correctly label all your graphs! For example, what the x and y axis represent.

The COVID-19 pandemic and the US-China trade tension have caused a significant decrease in China's demand for US exports.

1. Graphically show the likely short-run impact on US GDP and aggregate price levelusing the AD/AS model. Explain your prediction. HINT: Which curve in the AD/AS model would a change in US exports affect? [6 points = graph, 3 points explanation]

2. What is the anticipated result in US employment level? Explain [2 points]

3. What is the anticipated result in US inflation rate? Explain. [2 points]

4. The US-China trade tension was partly caused by the US imposing tariffs on Chinese imports. Do you agree with this economic policy? Explain your answer. [2 points]

5. With lockdowns during the pandemic, crude oil (a key input) price has fallen due to weak demand. How would the fall in oil price impact aggregate supply, real GDP and aggregate price level in the US? Show this in a AD/AS model and explain. [5 points = graph, 2 points = explanation]

Rubric

Answer 1

1.

Decrease in Chinese demand for US exports decreases US net exports (= exports - imports). When net exports decrease, it decreases aggregate demand, shifting AD curve leftward and decreasing both price level and real GDP.

In following graph, equilibrium is at point A where AD0 (aggregate demand) and SRAS0 (short-run aggregate supply) curves intersect with initial equilibrium price level (inflation) P0 and initial equilibrium real GDP (output) Y0. When exports decrease, AD0 shifts leftward to AD1, intersecting SRAS0 at point B with lower price level P1 and lower real GDP Y1.

2.

A decrease in real GDP decreases output, in turn decreasing US employment.

3.

Lower price level decreases inflation rate in US.

4.

Tariff on imports increase domestic price in US, which decreased US consumption, adding to the decrease in aggregate demand caused by lower exports. So the tariff was not the best economic policy to implement.

5.

When crude oil price decreases, it reduces production cost, so firms increase production. This increases aggregate supply, shifting SRAS curve rightward, decreasing price level and increasing real GDP.

In following graph, SRAS0 shifts rightward to SRAS1, intersecting AD0 at point B with lower price level P1 and higher real GDP Y1.