Question

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

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

Step-by-step solution

- 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.

- 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.

- 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.

- 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.

- 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.

Key concepts

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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.

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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.

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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.

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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.

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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.