Question

3. The United Kingdom (UK) held a national referendum (vote) on whether the UK should remain in the European Union (EU), or should exit the EU. Exiting the EU is likely to have several consequences (1) increased barriers to trade between the UK and the remaining EU countries; (2) Reduced refugee flows Use the AS/AD model to describe the short run and long run effect of the UK exit from the EU Submission status No attempt

Answer 1

The Brexit phenomenon will have large implications specifically when trade barriers cause trade deficit as well as subdued consumption and lower cash inflow into Britain's economy and as results companies face large scale losses and consequently this creates layoffs and restructuring and unemployment soars.

Moreover the government spending also reduces when Brexit occurs a new laws and taxes get proposed causing contractionary fiscal policy regime.

When unemployment soars the disposable income plunges and aggregat demand thus also reduces causing fall in GDP in real terms in short run alongwith lower prices and lower inflation.

However in long run economy recovers and the aggregate demand bounces back such that GDP rises.

PAGE NO: DATE: Price Level LRAS SRASO Eo Po -E2 AO o AD Real GDP CONTRALTIONARY FISCAL POLICY [