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if the world price of a commodity changes what happens to aggreate demand for one of...

if the world price of a commodity changes what happens to aggreate demand for one of the commodity producing countries ( show using AS/AD modelling ). Give detailed explanation of what happens to output,income and unemployment in that country due to changes in the world price of the commodity.

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Answer #1

If the world price of a commodity rises, its demand worldwide would fall or it would result in fall in exports.

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

A fall in export would lead to fall in aggregate demand which will shift aggregate demand curve to its left from AD to AD1 which cause price to fall from P to P1 and output traded to fall from Y to Y1. Fall in output produced will reduce the employment level and raise unemployment level.

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