Question

There is evidence of increasing protectionism in global trade (US and China trade war), which might cause a fall in global trade.
Explain what the expected impact of the fall in international trade on the Eurozone economy might be. Use the AD/AS model This section must include a written explanation as well as charts.

Answer 1

A fall in global trade will decrease exports more than the decrease in imports, lowering net exports, which decreases aggregate demand. A fall in aggregate demand shifts AD curve leftward, decreasing both inflation and real GDP. Unemployment increases.

In following graphs, initial equilibrium is at point A where AD0 (aggregate demand) and SRAS0 (short-run aggregate supply) curves intersect with initial equilibrium price level P0 and initial equilibrium real GDP Y0. When aggregate demand decreases, AD0 shifts leftward to AD1, intersecting SRAS0 at point B with lower price level P1 and lower real GDP Y1.