125 Assignment Solution: Analysis of a Demand/Supply Shock using the AD-AS Model

Solution:

China imports a great deal from the United States. Since import demand depends on a nation’s GDP, a slowdown in the Chinese economy would reduce China’s demand for U.S. exports.

A decrease in exports will reduce net export expenditures and shift aggregate demand to the left.

The decrease in AD will result in a lower level of real GDP and a lower price level.

A lower level of GDP will require a lower level of employment, so unemployment should rise. Lower incomes for households should reduce consumption.

Thus, an economic slowdown in one country can spread to its trading partners.