Answer to Question #97655 in Macroeconomics for Tiffany

Question

Apply your knowledge of the AD/AS model to predict the effect on economic variables (i.e., P, RGDP, interest rates, wages, savings and spending) of some events on the U.S. economy. Diagram the effect of the following events. Be sure to explain the effects in the short run and effects in the long run for each question, in words. To keep things clear, assume that in each case the economy starts out at long-run equilibrium.
d. Suddenly, foreign countries sell great quantities of important inputs such as steel and computer chips at very low prices in this country. Hint: the long-run effect will depend on whether the price decrease is permanent or not.

Answer 1

In the short term, cheap goods will be in great demand, therefore, the demand for similar more expensive domestic goods will fall.

this means that American companies producing these goods will sharply decrease profits, and perhaps some companies will be forced to close.

The government, protecting its national interests, the interests of its producers, will ban the export of these cheap goods, as a result of which, in the long term, national producers will restore domestic demand for their goods