Recession Among Trading Partners
The question
Assume the economy of Ardenne is initially in long-run equilibrium. Ardenne's largest trading partners fall into a deep recession, and buyers in those countries cut their purchases of Ardennian goods sharply. Assume the exchange rate and Ardennian households' purchases of foreign goods are unchanged. Show the short-run effect on Ardenne's economy, holding all else constant. Show the effect on the AD-AS Model graph.
Drag a curve, or use the arrow buttons. Want the free-play version with every control? Open this graph in the sandbox.
Recession Among Trading Partners: the worked answer
On the AD-AS Model graph, AD shifts left.
Why AD shifts left
Net exports are a component of aggregate demand. When foreign buyers purchase fewer Ardennian goods while Ardennian purchases of imports are held constant, net exports fall, so total spending on domestic output is lower at every price level and aggregate demand shifts to the left. The recession abroad does not change Ardennian firms' per-unit production costs, so short-run aggregate supply stays put, and it does not change Ardenne's resources or technology, so long-run aggregate supply does not move.
What happens to the equilibrium
The equilibrium price level falls and real GDP declines below full-employment output, opening a recessionary gap.
The mistake students make on this one
Many students shift SRAS left, picturing exporters cutting back production lines. Exporters do produce less, but that is a movement along an unchanged SRAS driven by weaker spending, and nothing in the stem changed what it costs an Ardennian firm to produce a unit.
On exam day
Route every international event through C plus I plus G plus Xn first. Fewer exports means a smaller Xn, and any change in a spending component is an AD shift, never a supply shift.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when AD shifts left and every other curve on the AD-AS Model graph stays where it started — the same standard an AP reader applies to a drawn graph: the right shift, and nothing extra. There is no AI involved; the rubric is the geometry.
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