Question

A fall in the value of the dollar againstother currencies makes U.S. final goods and services cheaper toforeigners even though the U.S. aggregate price level stays thesame. As a result, foreigners demand more American aggregateoutput. Your study partner says that this represents a movementdown the aggregate demand curve because foreigners are demandingmore in response to a lower price. You, however, insist that thisrepresents a rightward shift of the aggregate demand curve. Who isright? Explain.

Answer 1

Answer: I am right, the increased demand represents a rightward shift of the aggregate demand curve.

Explanation:

The increase in aggregate demand by foreigners occurred as a result of a fall in the value of the US dollars and aggreagrate price level stayed the same. Therefore, the change in aggregate demand didn't occur as a result of a change in price.

If agregrate demand changed as a result of a change in the aggregate price levels, there would be a change in quantity demanded and a movement along the demand curve.

It's only a change in price that result results in a movement along the aggregate demand curve.

Other factors that leads to a change in demand either shifts the aggregate demand curve to the left or to the right.

Therefore, an increase in aggregate demand as a result of the fall in value of US dollars causes the aggregate demand curve to shift to the right.

The shift in the aggregate demand curve to the right shows that demand has increased but aggregate price hasn't changed.