📚 Learning Guide
Full Employment Equilibrium
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If country Alpha experiences a recession in a major trading partner, which of the following is likely to occur in terms of full employment equilibrium?

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Choose the Best Answer

A

Decrease in aggregate demand leading to potential unemployment

B

Increase in aggregate supply due to higher exports

C

Immediate shift to long-run aggregate supply

D

Full employment is maintained regardless of external factors

Understanding the Answer

Let's break down why this is correct

Answer

When country Alpha's major trading partner goes through a recession, it means that the trading partner is buying less from Alpha. This decrease in demand can lead to fewer jobs in Alpha because companies may need to cut back on production and reduce their workforce. As a result, unemployment may rise, moving the economy away from full employment equilibrium, which is the state where everyone who wants to work can find a job. For example, if Alpha exports cars to the trading partner and they buy fewer cars, car manufacturers in Alpha might have to lay off workers, causing the unemployment rate to increase. Overall, the recession in the trading partner negatively affects Alpha's economy and pushes it away from full employment.

Detailed Explanation

When a major trading partner has a recession, they buy less from Alpha. Other options are incorrect because Some might think that a recession means more exports; People may believe that a recession leads to an immediate change in long-run supply.

Key Concepts

Full Employment Equilibrium
Aggregate Demand and Supply
Monetary Policy
Topic

Full Employment Equilibrium

Difficulty

medium level question

Cognitive Level

understand

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