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Imagine that in the year 2025, China’s economy increases significantly, causing an increase in demand for...

Imagine that in the year 2025, China’s economy increases significantly, causing an increase in demand for U.S. exports.

Use the ADAS model to explain the likely short run impacts on U.S. GDP and the aggregate price level. What do you anticipate to happen to U.S. consumption expenditures and U.S. employment? Explain your reasoning for each of your predictions and show graphically as appropriate.

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Answer #1

Ans. Increase in demand for US exports will increase the aggregate demand for goods and services in US. This will shift the aggregate demand curve rightwards from AD to AD'. This will create a shortage of goods and services in the market leading to an increase in price level from P to P' and an increase in real GDP from Y to Y'.
The increase in income level induces consumption, so, consumption expenditure increases and as the real GDP has increased, so, more people will be hired tk increase production, decreasing unemployment rate.

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