State how each of the following affects the US aggregate demand curve (increase, decrease, or no...

State how each of the following affects the US aggregate demand curve (increase, decrease, or no change).
The price level increases.
Consumers expect higher inflation in the future.
The value of the dollar increases relative to other currencies.
Foreign income decreases.

Solutions

Expert Solution

The price level increases: This causes the movement along the US Aggregate demand curve. Upward movement along the curve. Contraction in aggregate demand. Note that, the change in the price level would not shift the Aggregate demand curve but it leads to movement along the curve. (The aggregate demand decreases with a rise in price level, movement along the curve, not shift).

Consumers expect higher inflation in the future: So, they will demand more now. The aggregate demand curve would shift to right. The aggregate demand would rise. This would shift the aggregate demand to right.

The value of the dollar increases relative to other currencies: It means imports becomes cheap. We will export less and imort more. The net exports decreases. This decreases the aggregate demand. The aggregate demand curve shift to left.

Foreign income decreases. This would decrease the aggregate demand (by decreasing net exports)

Rahul Sunny answered 1 year ago

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