Question

For this assignment I want you to assume you are the President of the United States, and China (one of our largest export customers) decides to ban all imports from the U.S. What effect would that have on the U.S. economy? Consider AD, unemployment, inflation, and recession as you contemplate your answer. Once you have determined a potential danger to our economy, what fiscal policy tool would you use to mitigate the damage of China’s decision?

Answer 1

As export is the component of Aggregate demand. If the Chinese ban American Export, it will be a huge setback for the producers in the US and reduced demand for the finished goods in the US will cause the GDP to fall, it will decrease the aggregate demand in the economy and raise the unemployment.

It will also have the following effect on the economy:

Aggregate demand: Aggregate demand also includes the exports of the country. falling exports will reduce the aggregate demand and shift the aggregate demand curve to the left. Showing the demand at a lower quantity.

Unemployment: Because of the output fall, the employment will fall and unemployment will increase in the US.

Inflation: Fall in demand leads to deflation i.e. decreasing price of the good because of reduced demand. Lack of exports will force the sellers to sell those goods in the local market and lead to a fall in the price there are no chances of inflation but a possible deflation or recession in the economy.

We could use increased government expenditure to come out of the situation. More and more government increases its expenditure more product it will be buying, this could help fight the reduced demand in the economy and keep the employment level high.