Suppose there is an increase in income in the rest of the world, which in turn...

Suppose there is an increase in income in the rest of the world, which in turn increases the demand for domestic goods. Then, caeteris paribus (all else equal), this will cause:"

		Aggregate Demand shifts left
		Aggregate Supply shifts right
		Aggregate Demand shifts right
		Aggregate Supply shifts left.

Solutions

Expert Solution

As rest of the world income increases, then their demand for domestic good will increase and thus exports of a domestic will increase and will result in increase in Net exports. Thus, IS curve will shift to the right which will result in increase in aggregate demand and hence will shift Aggregate demand curve to the right. Thus option (c) is the correct answer and (a) is incorrect. Net exports is a demand side phenomena and thus will not affect aggregate supply. So, options (b) and (d) are incorrect.

Hence, the correct answer is (c) Aggregate Demand shifts right.

Rahul Sunny answered 1 year ago

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