Question

Imagine that in the year 2022, China’s economy slows significantly, causing a decrease in demand for US exports. Use the AD/AS model to explain the likely short run impacts on U.S. GDP and the aggregate price level. What do you anticipate will happen to U.S. consumption expenditure and U.S. employment? Please explain your reasoning for each of your predictions and show graphically as appropriate.

Answer 1

As per the situation, in 2022, China's economy slows down and demand decreases for US exports. In short run, Aggregate demand curve shifts left side from AD₁ to AD₂ as shown in the figure (1). This will apply pressure on price level to reduce as the supply is also decreasing. Output decreases from O₁ to O₂ due to lower demand and new short run equilibrium shifts from E₁ to E₂. Due to economic slow down, demand decreases, so unemployment will increase.This will affect both countries. From all these conditions, we anticipate decrease in US consumption expenditure.
   Any change in macro economic variables like Consumption, Export-Import, Government expenditure, Investments will lead shift in AD/AS curve.

FIGURE-1 AD LRAS SRAS AD2 ADI AD2 02 ; GDP