Question

Use the AS/AD model to explain the immediate and medium-run impact of the following events on short-run output, inflation, and the unemployment rate. (10 points each)

a) Negotiations breakdown and the United Kingdom makes a hard Brexit. The U.K. imports a significant number of intermediate goods from mainland Europe.

b) In response to the European Debt Crisis, the Greek government revises economic policy and limits licensing requirements, fees, and other barriers to entry that tend to increase the cost of business.

c) Donald Trump appoints a business associate and close friend as Fed Chair. Donald Trump, through the Fed, then funds his border wall through seigniorage.

Answer 1

Ans: a) This will result in an increase in imports in the UK. The net exports will decrease which is one of the major components of Aggregate demand, thus shifting the curve to left. as given below. This will decrease real Gdp or increase unemployment. This will further decrease the price.

Ans:b) this will decrease the cost of business and will have a positive effect on the aggregate supply curve, shifting it to right. This rightward shift will decrease price and inflation but will increase output. It will further decrease unemployment.

Ans: c This will increase government spending, shifting the aggregate demand to right. this will increase inflation and output. But will have a positive effect on employment.