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Suppose Canada, a trading partner of the United States, a recession. Using a well labeled diagram...

Suppose Canada, a trading partner of the United States, a recession. Using a well labeled diagram of AD-AS model, show and explain how this affects the US economy in the short-run as follows. (10 pts)

a. Draw a diagram to depict the event described above on the US economy, based on the AD-AS model. (2 pts)

b. Based on your diagram in (a), carefully explain how the event will impact real GDP the US (5pts)

c. Carefully explain what will happen to unemployment in the short-run. (3 pts)

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Answer #1

Canada, a trading partner of US is facing a recession.

a) As Canada is facing a recession, Canadian consumers will demand less of US products which means US will export less to Canada.

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

Fall in exports will reduce aggregate demand of US which shift demand curve of US to its left from AD to AD1 while supply remains the same.

b) It will reduce real GDP of US from Y to Y1 as depicted in the diagram above.

c) Unemployment in US is likely to rise in short run because producers there will need less of the labor to produce goods.

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