Question

A decline in foreign demand for U.S. goods: Suppose the European and Japanese economies succumb to a recession and reduce their demand for U.S. goods for several years. Using the AS/AD framework, explain the macroeconomic consequences of this shock, both immediately and over time.

Answer 1

Answer:

The decrease in the remote interest for US products will lessen the net fares of the US economy,  

AD = Consumption + speculation + government use + Net fares,  

As on factor net fare decay the AD bend will move leftward in the short run. So in short run the genuine GDP fall beneath than the degree of potential GDP.  

The short run impact  

Since a long time ago run Aggregate Supply Short-run Aggregate Supply PRICE Initial Aggregate Demand Final Aggregate Demand Real GDP (Billions of dollars)  

The underlying balance was given by the crossing point of the underlying total interest, SRAS and LRAS at E1. Presently the balance changes from E1 to E2 due to leftward move in the AD bend.  

Therefore ,the costs level abatement and furthermore the genuine GDP level.  

Over the long haul, firms will diminish the lessening the creation as request is less, so the interest for work likewise falls, which lead to diminish the wages of laborers, As interest for work and wages falls, the creation will fall and supply will move leftward.  

From the outline, it is indicated that new harmony at point E3 is the place potential genuine GDP accomplished yet at an even lower cost ( from P2 to P3), this implies collapse in the economy.