Question

Consider an open economy in which the aggregate supply curve slopes upward in the short run. Firms in this nation do not import raw materials or any other productive inputs from abroad, but foreign residents purchase many of the nation's goods and services. What is the most likely short run effect on this nation's economy if there is a significant downturn in economic activity in other nations around the world?

Short answer

Because of the decrease in aggregate demand, the short-run aggregate curve shifts to the right, establishing a new short-run equilibrium. Income spending falls as a result of lower foreign income, resulting in a shift to the left in the aggregate demand curve.

Step-by-step solution

Step 1:keynesian theory

Unemployment: Keynesian Theory accepts the fact that there is unemployment; the economy cannot operate in Full Employment Mode all of the time; it is only possible for a limited time. Government's Role: Keynesian Theory recognizes that the government must sometimes intervene to control/regulate the economy.

Step 2:short run effect on this nation's economy 

Because of the decrease in aggregate demand, the short-run aggregate curve shifts to the right, establishing a new short-run equilibrium. Income spending falls as a result of lower foreign income, resulting in a shift to the left in the aggregate demand curve..