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The COVID-19 pandemic and the US-China trade tension have caused a significant decrease in China's demand...

The COVID-19 pandemic and the US-China trade tension have caused a significant decrease in China's demand for US exports.

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

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Answer #1

As COVID-19 pandemic has caused a significant decrease in China's demand for U.S. exports.

There would be fall in aggregate demand for goods in the US as exports decrease, which in turn will lead to a fall in price level and employment level, as well as consumption expenditure in the US economy.

AS Price Level Fall in price level P E Decrease in aggregate demand E1 P2 Decrease in GDP AD AD Q2 Qu GDP

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