Question

How might actions/events in other countries outside the U.S. affect the aggregate supply or aggregate demand in the U.S.? Be sure to explain.

Answer 1

When the price level falls in other in other countries due to some actions, the net export component of aggregate demand changes. A lower price level lowers the demand for money, because less money is required to buy quantity of goods. The demand in other countries increases as price falls. GDP increases in other countries. As GDP of other countries increases their import decreases and hence the aggregate demand of U.S.. decreases. And as aggregate demand decreases aggregate supply also decreases. When the other countries undergo recession it directly affects the exports of U.S.. As these countries will not import goods from U.S., aggregate demand in U.S. will drop.

The international trade effect is the tendency for a change in the price level to affect net exports. A fall in price level causes rise in consumption, investment and net export components of aggregate demand. Since government purchases are determined through political process, we assume there is no casual link between the price level and the real volume of government purchases. Foreign price levels can affect aggregate demand in the same way as exchange rates. The trade policies of foreign countries affects net exports of U.S.

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