In: Economics
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 |
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Aggregate Supply shifts right |
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Aggregate Demand shifts right |
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Aggregate Supply shifts left. |
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.