Question

Suppose that unexpectedly rapid growth in real income abroad leads to a sharp increase in the...

Suppose that unexpectedly rapid growth in real income abroad leads to a sharp increase in the demand for American exports.

What impact will this change have on the price level, output, and employment in the long run in the United States?

-Output and employment will increase exerting modest upward pressure on the price level.

-The price level will increase, with no change in output and employment.

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Answer #1

Rise in real income due to rise in demand of exports

Aggregate demand = Consumption + Investment + Government Spending + Exports - Imports

As exports rises, aggregate demand rises with it which will shift the demand curve to its right from AD to AD1 while supply curve remains the same. It shift the price from P to P1 while output level rises from Y to Y1 which will raise the employment level as more people are needed to produce more number of units.

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