Question

Consider the net export function and the AE curve in a simple macro model with demand - determined output What is the effect of an exogenous increase in the domestic price level? O A. The net export function rotates upward and the AE curve shifts upward OB. The net export function shifts upward and the AE curve shifts downward O C. The net export function and the AE curve both shift upward. O D. The net export function and the AE curve both shit y ard. O E The net export function shifts downward and the AE curve shifts upward.

Answer 1

D. The net export function and the AE curve both shift downward.

A higher price level increases the relative price of domestic exports relative to other countries and reduces the relative price of foreign imports from other countries. This leads to an increase in imports and consequent decline in exports. Thus, net export function declines and shifts downwards.

A higher price level reduces the real income of the consumers and hence the expenditures of consumers decreases. Thus there is a downward shift in the aggregate expenditure curve.