Question

. A fall in the value of the US dollar against other currencies makes US final goods and services cheaper to foreigners even though the US aggregate price level stays the same. As a result, foreigners demand more American aggregate output. Your study partner says that this represents a movement down the aggregate demand curve because foreigners are demanding more in response to a lower price. You, however, insist that this represents a rightward shift of the aggregate demand curve. Who is right? Explain. (1 paragraph)

Answer 1

Answer:

The partner who insist in the rightward shift

Explanation:

The aggregate demand curve is on a plot with aggregate US output on the X axis and the US aggregateprice level on the Y axis. If you want to know what happens to output demanded in response to changes in the US aggregate pricelevel, you shift ALONG the demand curve. If anything else, except the US aggregate price level changes, you're shifting the entire curve. For example, if interest rates fall, that increasesinvestment and shifts the curve to the right.

Note that, while foreigners are indeed responding to a lowerprice, the lower price in question is in the price the foreign nationals are paying, not the US prices.