Question

Suppose that an economy starts at the optimal point in the AD/AS model. Suppose that Mexico's economy is in a very strange growth/ boom period (Mexico is the United States' largest trading partner). How does this affect the US economy? Show on a graph and explain in words.

Answer 1

If Mexican economy experiencing a boom, its AD must have shifted to the right. Then, the level of output income employment and price level must be higher in Mexican economy. With increased income, they are likely to buy more goods from the US so we expect exports from the US economy to experience a rise in demand. This increases the net exports in the US economy and so AD in the US economy also increases. This would increase the level of output income employment and price level in the US economy as well. Hence a boom in the economy of a trading partner helps in bringing a similar wave of expansion in the native economy