Question

Suppose the Eurozone's central bank tries to stimulate the economy by lowing interest rate, what will happen to expenditures and real GDP in the Eurozone? If the Eurozone is a principal trading partner with the U.S.., how will the U.S. economy be affected by the Eurozone's real GDP change?

Answer 1

It is likely that the expenditure and real GDP in the eurozone increases. This is because when the interest rate is reduced investment and consumption expenditure is increased and this increases aggregate expenditure as well as real GDP when the aggregate expenditure curve shifts to the right.

Because of the real GDP has increased people in Euro Zone will demand more of the goods and services produced by the rest of the world include in the United States. Therefore United States can experience increase in exports and this will increase its own aggregate expenditure resulting in increasing its own real GDP. Therefore it can be said that stimulation of the Eurozone will stimulate US economy as well