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2. Recent proposed and enacted trade restriction (tariffs) are designed to limit imports. Assuming that other...

2. Recent proposed and enacted trade restriction (tariffs) are designed to limit imports. Assuming that other countries do not retaliate against our exports (an unrealistic assumption), how reduction in imports will affect the aggregate-demand? Using an Aggregate-Demand/Aggregate-Supply graph, demonstrate.

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Answer #1

A decline in the import will allow the local firms to increase their local production. This will lead to higher employment in the nation and increase the price of the local products. The Aggregate demand curve will shift to the right at a higher price and higher output.

  

The economy was at equilibrium at point E1 where the AD1 and SRAS1 meet with the LRAS curve. The price in the economy was P1 and output Yf1. After a decline in imports, the AD1 shifted to AD2 at higher price P2 and higher output Yf2. The new equilibrium is at point E2.

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