Question

Consider Figure 11-9. Suppose that businesses in this nation initially had been exporting significant amounts of domestically produced goods and services abroad. Assume that other nations of the world have experienced a sudden decline in economic conditions. What happens to the nation's aggregate demand curve? In the short run, will the nation experience an inflationary gap or a recessionary gap? Explain.

Short answer

In the short run, will the nation experience a recessionary gap

Step-by-step solution

introduction

Financial stoppage in different countries of the world will move the country's AD bend to one side. The economy will encounter a recessionary gap in the short run.

explanation

The financial slump in the remainder of the world will prompt a diminishing in sends out and consequently, in AD. Thus, the AD bends movements to one side, from $A{D}_1$to $A{D}_2$. This gap of $\$0.2$trillion causes the value level to diminish from $110$ to $105$. In this way, there is a recessionary gap in the short run.