Question

if the world price of a commodity decreases, what happens to aggreate demand in the long run and short run 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 lower price of the commodity.

Answer 1

When world price of a commodity, decreases, then it increaases the imports in the country and AD decreases in the short run. As a result, AD curve shifts to the left. In the long run, LRAS also shifts to the left, as prodcution decreases in the wake of lower price in world market.

With decrease in AD, the real output decreases, and firms do layoff of some of the workers. It increases unemployment rate in the economy. As a result, income level of people also decreases in the economy.