Export Slump and Deregulation
The question
Assume the economy of Ancora is initially in long-run equilibrium. Ancora's largest trading partners fall into a deep recession and buyers there sharply cut their purchases of Ancoran goods, and in the same year Ancora's legislature repeals a set of compliance requirements that had forced firms in every industry to spend money on paperwork for each unit of output they produced. Assume the exchange rate, Ancoran households' purchases of foreign goods, the quantity of resources, and the level of technology are all unchanged. Show the short-run effect on Ancora'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.
Export Slump and Deregulation: the worked answer
On the AD-AS Model graph, AD shifts left and SRAS shifts right.
Why AD shifts left and SRAS shifts right
Weaker foreign purchases reduce net exports, a component of aggregate demand, so total spending falls at every price level and aggregate demand shifts to the left. The repeal lowers what it costs firms to make each unit of output, so at every price level firms are willing to produce more and short-run aggregate supply shifts to the right. The repeal changes neither the quantity of resources nor the level of technology, so long-run aggregate supply does not move. Both shifts push the price level down, so the price level definitely falls. They push output in opposite directions, because lost export sales reduce real GDP while lower per-unit costs raise it, so the change in real GDP is indeterminate and depends on which shift is larger.
What happens to the equilibrium
The price level definitely falls, while real GDP is indeterminate and depends on whether the export loss or the cost relief is the larger shift.
The mistake students make on this one
The usual wrong answer signs both outcomes, most often as "the price level falls and real GDP falls", because a recession abroad sounds like the dominant event. Nothing in the stem ranks the two shifts, and the cost relief pushes output the other way, so output cannot be signed. A second common error is shifting LRAS right for the deregulation, but removing per-unit paperwork costs is a cost change, not an increase in the economy's resources or technology.
On exam day
Scan the stem for two independent shocks before you draw anything, and when one hits spending while the other hits per-unit costs, expect exactly one determinate outcome and state in words which variable you cannot sign.
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 SRAS shifts right 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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