4. A fall in the value of the dollar againstother currencies makes U.S. final go

Question

4. A fall in the value of the dollar againstother currencies makes U.S. final goods and services cheaper toforeigners even though the U.S. aggregate price level stays thesame. As a result, foreigners demand more American aggregateoutput. Your study partner says that this represents a movementdown the aggregate demand curve because foreigners are demandingmore in response to a lower price. You, however, insist that thisrepresents a rightward shift of the aggregate demand curve. Who isright? Explain.

Explanation / Answer

The aggregate demand curve is on a plotwith aggregate US output on the X-axis and the US aggregateprice level on the Y-axis. If you want to know what happensto output demanded in response to changes in the US aggregate pricelevel, you shift ALONG the demand curve. If anything elseexcept US aggregate price level changes, you're shifting the entirecurve. 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 foreignnationals are paying, not the US prices.

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