Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 27: Problem 21

Suppose that the E.U. economy goes into an expansion. Explain the effect of the expansion on U.S. real GDP and unemployment in the short run.

Short Answer

Expert verified
The E.U. expansion increases U.S. real GDP and decreases U.S. unemployment in the short run.

Step by step solution

01

- Understanding Economic Expansion

An economic expansion in the E.U. implies that the E.U. economy is growing. This growth typically involves increased consumer spending, higher business investments, rising incomes, and more robust economic activity overall.
02

- Impact on U.S. Exports

During the E.U. expansion, E.U. consumers and businesses will have higher incomes and greater confidence. This increases their demand for imported goods, including those from the U.S. Therefore, U.S. exports to the E.U. are likely to rise.
03

- Effect on U.S. Aggregate Demand

Higher exports to the E.U. increase the aggregate demand in the U.S. economy. Aggregate demand is the total demand for goods and services within the economy. An increase in exports means an increase in aggregate demand.
04

- Real GDP Impact

An increase in aggregate demand generally leads to higher real GDP in the short run. Real GDP measures the value of all goods and services produced within the country, adjusted for inflation. Hence, with increased demand from the E.U., U.S. real GDP will likely grow.
05

- Unemployment Effects

As real GDP increases, businesses will need more labor to meet the higher demand for their products. This need results in firms hiring more workers, thus decreasing the unemployment rate. Therefore, U.S. unemployment is likely to fall in the short run.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

Key Concepts

These are the key concepts you need to understand to accurately answer the question.

headline of the respective core concept
Economic expansion refers to a period when an economy is growing and overall economic activity is rising. When the E.U. experiences economic expansion, it can have noticeable effects on other economies, including the U.S. economy. This can lead to various changes such as an increase in 'real GDP' and a decrease in the 'unemployment rate'. Let's dive deeper into these core concepts.
headline of the respective core concept
Real GDP stands for 'real Gross Domestic Product'. It measures the value of all goods and services produced within a country, adjusted for inflation. This adjustment is crucial because it provides a more accurate representation of an economy's size and how it's performing over time. When the E.U. economy expands, U.S. exports increase, leading to higher aggregate demand and potentially boosting the real GDP of the U.S. Increased real GDP signifies that the U.S. is producing more goods and services, contributing to economic growth.
headline of the respective core concept
Aggregate demand is the total demand for goods and services within an economy at a given overall price level and in a given time period. Higher aggregate demand indicates that consumers and businesses are spending more money on domestic goods and services. During an economic expansion in the E.U., the demand for U.S. goods rises as European consumers and businesses purchase more imports. This rise in demand helps increase the aggregate demand in the U.S., stimulating economic activity and contributing to growth.
headline of the respective core concept
Unemployment rate represents the percentage of the labor force that is jobless and actively seeking employment. As real GDP grows due to higher aggregate demand from increased exports, U.S. businesses need to produce more goods and services to meet this demand. Consequently, firms hire more workers to keep up with production needs. This increase in employment reduces the unemployment rate, reflecting a healthier job market and a stronger economy.
headline of the respective core concept
U.S. exports are goods and services produced in the United States and sold to buyers in other countries. Economic expansion in the E.U. boosts the incomes and confidence of European consumers and businesses, resulting in higher demand for U.S. exports. An increase in U.S. exports contributes positively to the nation's real GDP and supports economic growth by expanding markets for U.S. products. This international trade relationship is crucial for sustainability and economic advancement.

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Exports and Imports Increase Real exports of goods and services increased 6.0 percent in the second quarter, compared with an increase of 4.4 percent in the first. Real imports of goods and services increased 2.9 percent, compared with an increase of 3.1 percent. Source: Bureau of Economic Analysis, August 29,2012 Explain how the changes in exports and imports reported here influence the quantity of real GDP demanded and aggregate demand. In which of the two quarters reported did exports and imports make the greater contribution to aggregate demand growth?

Brazil Falls into Recession A decade ago Brazil had rapid growth, but now its economy is experiencing a slowdown with investment falling and inventories increasing. Potential GDP growth rate has slowed. Business and consumer confidence has fallen. Source: BBC News, August 29, 2014 a. Explain the effect of a decrease in investment on real GDP and potential GDP. b. Explain how business and consumer confidence influences aggregate expenditure.

Gross Domestic Product for the Second Quarter of 2012 The increase in real GDP in the second quarter primarily reflected increases in personal consumption expenditures, exports, and investment. Government spending decreased. Source: Bureau of Economic Analysis, August 29,2012 Explain how the items in the news clip influence U.S. aggregate demand.

The Fed cuts the quantity of money and all other things remain the same. Explain the effect of the cut in the quantity of money on aggregate demand in the short run.

Labor productivity is rising at a rapid rate in China and wages are rising at a similar rate. Explain how a rise in labor productivity and wages in China will influence the quantity of real GDP supplied and aggregate supply in China.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free