Question

For the question below, write an explanation of the short-run effect (including the determinant of AD or AS that is causing the shift, the line that shifts (AD or AS), the direction of the shift (left or right), and the impact on output and price level (increase or decrease) and provide a properly drawn and labeled aggregate demand and aggregate supply graph for the scenario.

When Congress authorizes a tariff on imported steel, steel producers around the world boycott American products.

Answer 1

If the tariff is imposed on steel, steel producers will increase demand because it will be costly to import steel from foreign countries. The domestic demand for steel increases and domestic producers charge a high price to meet demand. The aggregate demand curve rises to the right, but the aggregate supply remains the same, leading to increased price and output.