Consider the accompanying diagram to the right showing the AD curves in two different economies. One economy is Autarkland-it does not trade with the rest of the world (autarky is a situation in which a country does not trade with other countries). The other economy is Openland-it exports to and imports from the rest of the world. Initially each country has price level Po- Openland and Autarkland a. Explain why an increase in the domestic price level (for a given exchange rate) reduces net exports in Openland. How would you illustrate this with the AE curve in the 45-line diagram? When Openland's domestic price level rises (and the exchange rate remains unchanged), foreigners see Openland's goods as expensive relative to goods produced in their own country and expensive relative to goods imported from countries other than Openland. As a result, Openland's Price Level (P) At the same time, Openland's residents see the products of foreign countries become expensive relative to goods produced in their own country. As a result, they shift their expenditures goods produced in Openland, and Openland's AD Openland AD Autarkland The combination of these changes reduces net exports in Openland. In the 45-line diagram, this could be illustrated by the AE curve. Equilibrium real GDP and equilibrium desired aggregate expenditure Real GDP (Y) b. Explain why the AD curve is steeper in Autarkland than in Openland. An increase in the domestic price level in Openland directly reduces net exports and causes the change in AE described in part (a), while an increase in domestic price level in Autarkland directly net exports, resulting in the AE curve as a result of a change in net exports. Therefore, for the same change in price level, aggregate expenditure in Autarkland changes by it does in Openland. As a result, equilibrium real GDP in Autarkland changes by it does in Openland for the same change in price level, resulting in an AD curve in Autarkland that is steeper than in Openland. c. If there are never any net exports in Autarkland, why isn't the AD curve vertical? Explain what other aspect of the economy generates a downward-sloping AD curve. A change in the price level does not only affect net exports. In addition, an increase in the domestic price level leads to a in , which results in the AE curve. This generates a downward-sloping AD curve. Click to select your answer(s).Consider the accompanying diagram to the right showing the AD curves in two different economies. One economy is Autarkland-it does not trade with the rest of the world (autarky is a situation in which a country does not trade with other countries). The other economy is Openland-it exports to and imports from the rest of the world. Initially each country has price level Po- Openland and Autarkland a. Explain why an increase in the domestic price level (for a given exchange rate) reduces net exports in Openland. How would you illustrate this with the AE curve in the 45-line diagram? When Openland's domestic price level rises (and the exchange rate remains unchanged), foreigners see Openland's goods as expensive relative to goods produced in their own country and expensive relative to goods imported from countries other than Openland. As a result, Openland's Price Level (P) At the same time, Openland's residents see the products of foreign countries become expensive relative to goods produced in their own country. As a result, they shift their expenditures goods produced in Openland, and Openland's AD Openland AD Autarkland The combination of these changes reduces net exports in Openland. In the 45-line diagram, this could be illustrated by the AE curve. Equilibrium real GDP and equilibrium desired aggregate expenditure Real GDP (Y) b. Explain why the AD curve is steeper in Autarkland than in Openland. An increase in the domestic price level in Openland directly reduces net exports and causes the change in AE described in part (a), while an increase in domestic price level in Autarkland directly net exports, resulting in the AE curve as a result of a change in net exports. Therefore, for the same change in price level, aggregate expenditure in Autarkland changes by it does in Openland. As a result, equilibrium real GDP in Autarkland changes by it does in Openland for the same change in price level, resulting in an AD curve in Autarkland that is steeper than in Openland. c. If there are never any net exports in Autarkland, why isn't the AD curve vertical? Explain what other aspect of the economy generates a downward-sloping AD curve. A change in the price level does not only affect net exports. In addition, an increase in the domestic price level leads to a in , which results in the AE curve. This generates a downward-sloping AD curve. Click to select your answer(s)
