Macroeconomics Case Study 2022

Macroeconomics 1
Name
ECON 1246: Economics
Instructor
Date
Part A

As of 2017, China got ranked as the largest importer of US products estimated at the cost
of about $526 billion. The U.S., on the other hand, as of 2017, became the largest exporter to
China with an estimated value of 430 billion.
Iron ore and coal have remained to be Australia’s important exports, which account for more
than $120 billion. Education services follow with 32.4 billion1. Such products serve as important
commodities that China purchases from Australia.
Trade war
A trade war arises when one country retaliates against another nation by imposing import
tariffs. A trade war in the global economy can damage consumers and enterprises of both
countries, and the contagion can spread to impact components of both economies.
Part B
a)
Tariffs imposed by the US will increase the prices of Chinese products, making them
expensive, this will reduce their demand reducing income to China from their products.
b)
One salient feature of the short run is that there is a decline in aggregate demand and a
shift of the AD curve from AD1 to AD2 leads to a fall in output from Y1 to Y2 as revealed by
points E and E2.
1 David Chau.
Australia's fortunes are linked to China's economy — for better
or
Worse,January 15,2019 ( accessed September 26, 2019);available from
https://www.abc.net.au/news/2019-01-15/china-economy-slowdown-will-affect-
australia/10716240.

In the long run, where output is at its natural level, the decline in aggregate demand
translates to a fall in the level of price from P to P1 as portrayed by points E and E1.In a nutshell,
a decline in aggregate demand in the short run translates to a reduction in output but in the long-
run output gets back to its normalcy owing to price adjustment by the firms.
c)
II) China’s response
Devalue the currency
The Central Bank could lower Yen’s currency value, and this would favor exports as they
would become cheaper for other nations to import, thus overshadowing price increments arising
from the tariffs imposed by the US However, Analysts postulated that China has not been
supporting its currency following its recent decline revealing that they are allowing the market
forces to take charge. The Yuan has fallen against the dollar consequently for a year and the