Question

6. Using the AS/AD model, show the effect on the US economy of a world- wide recession reducing demand for US exports for a number of periods before the world economy recovers. Describe the process of returning to the steady state.

Answer 1

Woeld wide effects of recession in short run cause sharp drop in liquidity and cause money demand to reduce due to unemployment and liquidity crunch.

Consequences being resuced disposable incomes and thus lower consumption and hence lower aggregate demand which shifts leftwards causing prices to drop and so does the real GDP. Subsequently the Us exports too decline as buyers too face cash crunch.

However in long run the economy recovers and thus exports ride in long run due to higher liquidity in hands of buyers and lower unemployment which increases disposable incomes.

| DATE: RECESSION Prices LRAS PO TT PIE- ADO ADI YI YO Real GOPLY