Answer to Question #97955 in Macroeconomics for shivanshu

Question

The United Kingdom (UK) held a national referendum (vote) on whether the UK should remain in the European Union (EU), or should exit the EU. Exiting the EU is likely to have several consequences: (1) increased barriers to trade between the UK and the remaining EU countries; (2) Reduced refugee flows.

Use the AS/AD model to describe the short run and long run effect of the UK exit from the EU.

Answer 1

 The Brexit will have serious implications in terms of reduced trade of goods due to increased barriers between the UK and the remaining countries. With a reduction in trade volume in the United Kingdom, the most economic impact might be on; trade and exchange movements, financial industry, labor migration and a long-term effect on location of industry and trade.

 If the UK exits from the European Union in the short-run, the aggregate supply and demand  curve shift to the left hence the resulting in decrease real output and also low prices of goods and services. In the long run the aggregate supply and demand curve are vertical lines at the potential level of output. Therefore, the UK will be negatively affected by its exit from the European Union.