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Question 21
(1) a higher price level
(2) a decrease in the real interest rate
(3) rapid growth in real income in Japan to a decrease in aggregate demand in the United States?
(4) an increase in the exchange rate value of the dollar
(4)

Ask by Lawson Martinez. in Cayman Islands
Mar 31,2025

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An increase in the exchange rate value of the dollar causes a decrease in aggregate demand in the United States.

Solución

  1. The aggregate demand function is given by
    where represents consumption, investment, government spending, and net exports.
  2. Let’s analyze each option to see its effect on aggregate demand in the United States:
    • (1) A higher price level:
      A change in the price level results in a movement along the aggregate demand curve rather than a shift of the curve. It does not change the underlying determinants (i.e., , , , or ).
    • (2) A decrease in the real interest rate:
      A lower real interest rate tends to stimulate borrowing and spending. This boosts components like consumption and investment, leading to a shift of the aggregate demand curve to the right. It does not cause a decrease in aggregate demand.
    • (3) Rapid growth in real income in Japan:
      When real income in Japan increases rapidly, Japanese consumers have more purchasing power and may increase their demand for foreign (including U.S.) goods. This would tend to increase U.S. exports and thereby increase U.S. aggregate demand rather than decrease it.
    • (4) An increase in the exchange rate value of the dollar:
      An increase in the value of the dollar (i.e., an appreciation) makes U.S. exports more expensive for foreign buyers and imports cheaper for U.S. residents. This leads to a reduction in net exports and therefore shifts the aggregate demand curve to the left, decreasing aggregate demand.
  3. Based on the analysis above, the factor that causes a decrease in aggregate demand in the United States is:

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Extra Insights

Let’s dive into the fascinating world of economics! Firstly, when a higher price level occurs, it often leads to a decrease in consumers’ purchasing power, causing people to buy less. This can reduce aggregate demand, especially in the U.S. when consumers start favoring cheaper imports over domestic goods.
Now, regarding real interest rates, a decrease tends to encourage borrowing and spending, which could potentially stimulate demand. However, if Japan’s rapid growth leads to more attractive investment opportunities abroad, U.S. investors might shift their focus, which might dampen U.S. aggregate demand as funds flow elsewhere instead! How’s that for a rollercoaster of economic interactions?

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\begin{tabular}{l|l}\multicolumn{1}{l}{ A variable that can't be accounted for is } & The author backs up the statement that the economy \\ can be unpredictable by pointing out that \\ a natural disaster such as a hurricane. As the & result of a hurricane, demand is guaranteed \\ to increase in a way that could not have been & (A) banking panics occur when confidence in the financial \\ system is strong. \\ predicted because the flow of goods into & (B) natural disasters can affect the demand for goods and \\ disrupt production. \\ impacted areas is blocked. If crops or power \\ facilities like oil refineries are damaged, then & C. customers are more willing to buy something when \\ interest rates are low. \\ demand is also affected. & (D) inflation occurs when prices for goods and services \\ decrease too quickly. \end{tabular}
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