Macro Foundations · advanced
What moves on the Aggregate Supply – Aggregate Demand diagram
Tariffs raise input costs (SRASSRASShort-run aggregate supply: what firms produce at each price level while wages and input costs are still sticky. left) while retaliation cuts exports (AD left): output falls, price effect ambiguous.
Start at equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change..
The country imposes tariffs on imports; trading partners retaliate against its exports.
Tariffs raise the cost of imported inputs. SRASSRASShort-run aggregate supply: what firms produce at each price level while wages and input costs are still sticky. shifts left.
Retaliation cuts export demand. AD shifts left.
New equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change.: output unambiguously falls; the price-level effect is ambiguous (cost-push up vs demand-pull down).
Examiners ask this as: tariff war, trade war, tariffs imposed, retaliation tariffs, protectionism.
Other scenarios on Aggregate Supply – Aggregate Demand