Draw graphs showing the aggregate demand and short-run aggregate supply curves in each of four countries: Mexico, Japan, Germany, and the United States. Assume that each country is initially in equilibrium with a real GDP of Y 1 and a price level of P 1 . Now show how each of the following four events would affect aggregate demand, the price level, and real GDP in the country indicated. 1. The United States is the largest foreign purchaser of goods and services from Mexico. Howdoes an expansion in the United States affect real GDP and the price level in Mexico? 2. Japan’s exchange rate falls sharply. How does this affect the price level and real GDP in Japan? 3. A wave of pro-German sentiment sweeps France, and the French sharply increase theirpurchases of German goods and services. How does this affect real GDP and the price level inGermany? 4. Canada, the largest importer of U.S. goods and services, slips into a recession. How does thisaffect the price level and real GDP in the United States?
1. Mexico’s exports increase, shifting its aggregate demand curve to the right. Mexico’s real GDP and price level rise, as shown in Panel (a).
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- Summer '18