Question

For each situation listed below, state whether the change will cause U.S. aggregate

      expenditures, and therefore equilibrium GDP, to increase or decrease and explain

      why it will either increase or decrease.

1. Depreciation of the U.S. dollar.
2. Decreased costs for machinery in the United States.
3. Decreased interest rates in the United States.

Answer 1

Ans.

a) Depreciation of US dollar will make the exports from US cheaper but imports to US costlier. So, demand for US exports will increase but demand for importa to Us will decrease leading to increase in net exports which increases the aggregate expenditure on the domestic goods and services. Thus, increasing the aggregate demand for goods and services which leads to increase in GDP and price level at equilibrium.

b) A decrease in cost of machinary in US will decrease the cost of production leading increase in profit level which encourages production level increasing aggregate supply in the economy increasing GDP bit decreasing price level at equilibrium.

c) A decrease in interest rate leads to a decrease in cost of borrowing inducing private investment and consumption spending. Also, a decrease in interest rate leads to increase in net capital outflow which leads to depreciation of US dollar and depreciation of US dollar will make the exports from US cheaper but imports to US costlier. So, demand for US exports will increase but demand for imports to US will decrease leading to increase in net exports. So, an increase in net exports, investment and consumption spending increases the aggregate expenditure on the goods and services in the US. Thus, increasing the aggregate demand for goods and services which leads to increase in GDP and price level at equilibrium.

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