Question

3. GRAPH ONLY. Label axes, lines and equilibrium points. Explain briefly the reason any line shifts. The US is close to full employment, when we go into a severe recession (unemployment is approaching 12%). Congress decides to save US jobs by imposing high tariffs on all foreign goods. Because rest of the world retaliates, our next exports are unchanged, although the level of imports and exports has decreased. Unemployment increases and exchange rates remain the same. A PPC curve, exchange rate graph, and a supply and demand graph for ONE exported good and ONE imported god are required.

Answer 1

1. PPC curve

When the economy faces recession and unemployment rises, the total number of goods and services produced would decrease in the economy as a result. This can be shown with an inward shift in the production possibility curve or PPC from PPC1 to PPC2:

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2. Exchange rate graph:

When exports and imports both decrease but the level of net exports remains the same, there is no change in the exchange rate of the currency. Therefore, both the supply and demand for US dollars is reduced but they offset each other to keep the exchange rate at the same level:

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3. Graph for one exported good

The supply curve of exported good would shift upwards by the amount of tariff imposed by the partner countries:

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4. Graph for one imported good

As the price of the imports rises, the demand curve will shift downwards by the amount of tariff imposed by the country as the imports are now more expensive:

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