Question

How would aggregate demand change if foreign incomes increase and the exchange rate value of the dollar increases? a. Neither change would affect aggregate demand. b. The increase in income would decrease aggregate demand; the increase in the exchange rate would increase aggregate demand. c. The increase in income would increase aggregate demand; the increase in the exchange rate would decrease aggregate demand. d.

Both changes would decrease aggregate demand If the exchange rate value of the dollar depreciates relative to other currencies, we would expect a. U.S. exports to decrease. b. U.S. exports to increase. c. U.S. imports to increase. d. aggregate demand in the United States to decrease.

Which one of the following factors will most likely cause an increase in aggregate demand? a. an increase in the expected inflation rate b. an increase in the real interest rate c. a decrease in net exports due to falling incomes abroad d. a technological development that decreases the cost of producing computer chips

Answer 1

When foreign incomes increase they demand more of our goods so our exports increase. If exchange rate value of the dollar increases, it becomes expensive and so exports fall and imports are increase. In total, AD increases at first and decreases in the second. Select C

If the exchange rate value of the dollar depreciates Dollar becomes cheaper to buy so exports increase and imports decrease. Select B

An increase in the expected inflation rate will encourage consumption now because future consumption is expensive with higher inflation. This increases AD. Select A.