Question

You are an economic advisor to the president. You observe an increase in exports. Assume the economy was operating at the full employment level of real GDP prior to the increase in exports. Describe the state of the economy and advise the president on the appropriate policy action by completing the following sentences: a. The increase in exports will lead to an increase in net exports and, in turn, an increase in aggregate demand. As a result, real GDP will increase. b. The problem that this event will cause is not specified. c. Appropriate policy actions would include decreasing taxes and/or increasing government purchases. d. These actions will smooth out the business cycle by bringing actual real GDP back toward full-employment GDP.

          You are an economic advisor to the president. You observe an increase in exports. Assume the economy was operating at the full employment level of real GDP prior to the increase in exports. 

Describe the state of the economy and advise the president on the appropriate policy action by completing the following sentences: 

a. The increase in exports will lead to an increase in net exports and, in turn, an increase in aggregate demand. As a result, real GDP will increase. 

b. The problem that this event will cause is not specified. 

c. Appropriate policy actions would include decreasing taxes and/or increasing government purchases. 

d. These actions will smooth out the business cycle by bringing actual real GDP back toward full-employment GDP.

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Added by Beatriz A.

Principles of Economics

Gregory Mankiw 8th Edition

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Solved by Expert Andrew Davis

08/07/2022

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As a result, real GDP will increase. ** Show more…

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You are an economic advisor to the president. You observe an increase in exports. Assume the economy was operating at the full employment level of real GDP prior to the increase in exports. Describe the state of the economy and advise the president on the appropriate policy action by completing the following sentences: a. The increase in exports will lead to an increase in net exports and, in turn, an increase in aggregate demand. As a result, real GDP will increase. b. The problem that this event will cause is not specified. c. Appropriate policy actions would include decreasing taxes and/or increasing government purchases. d. These actions will smooth out the business cycle by bringing actual real GDP back toward full-employment GDP.

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Transcript

00:01 So here we have this story about net exports, but first, since the answers involve aggregate demand, aggregate supply, i'm just going to draw aggregate demand, aggregate supply first.

00:11 So aggregate demand, aggregate supply is a story about firms, aggregate supply, and demand for products, aggregate demand.

00:19 And here we have a shock of net exports.

00:23 Net exports are going to increase, right? so the key thing is that this is a part of aggregate demand, right? aggregate supply is firm business structure or firm cost structures, right? that's what aggregate supply is.

00:42 It's talking about the cost structures of the firms, whereas aggregate demand is equal to aggregate sort of expenditure, c plus i plus g plus nx, net exports.

00:54 So clearly we have an aggregate demand shock here.

00:57 Aggregate demand is going to go up and out as for any price level, at any price level, people want more of what we produce.

01:07 So aggregate demand is going to increase, right? as a result, right, we have a not really, people might debate whether this is a problem, but relative to the initial equilibrium, prices are rising and the economy is boomed, right? so this leads to prices up and output going up as well.

01:30 Now, what might the president want to do about this, right? we want to smooth out the business cycle, right? the goal is to say, look, this is not a sustainable place to be.

01:42 If we let the economy overheat, all that's going to happen is we're going to get a bunch of inflation.

01:47 So, right, we want to stay, the goal is to stabilize economy...

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