Suppose we witness a fall in the value of the dollar against other currencies, which makes U.S. final goods and services cheaper to foreigners even though the U.S. aggregate price level stays the same. As a result, foreigners demand more American aggregate output. Your initial belief is that this represents a movement down the aggregate demand curve because foreigners are demanding more in response to a lower price. Your research, however, insist that this represents a rightward shift of the aggregate demand curve. How can you explain this?

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22-02-2020
Business

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Suppose we witness a fall in the value of the dollar against other currencies, which makes U.S. final goods and services cheaper to foreigners even though the U.S. aggregate price level stays the same. As a result, foreigners demand more American aggregate output. Your initial belief is that this represents a movement down the aggregate demand curve because foreigners are demanding more in response to a lower price. Your research, however, insist that this represents a rightward shift of the aggregate demand curve. How can you explain this?

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Answer:

The research is accurate

Explanation:

My initial belief was the demand curve will shift downwards but it will happen in the long run because when demand will increase the price will increase which will ultimately shift the demand curve downward. But, at the movement in the short run, the demand curve will go rightward due to the decrease in price. A decrease in price always increases the demand and will push the demand curve rightwards.