Concept Introduction:
Aggregate
Shift in Aggregate Demand Curve: There are several factors on which the shifting of demand curve depends. Some of them are:
- Changes in expectation: When consumers are more confident about future then AD curve shifts in the right direction and vice versa.
- Changes in wealth: When the wealth of an individual increases that means real value of assets increases then the AD curve shifts in right direction and when it decreases the curve shifts leftward.
- Size of stock of physical capital: When the size of stock is small then AD curve shifts rightward and vice versa.
- Fiscal policy: It includes government expenditure and taxes. When government expenditure is increased or taxes are decreased then AD curve shifts rightward and vice versa.
Monetary policy: It includes money supply changes. When money supply increases AD curve shifts rightward and vice versa.
Explanation of Solution
- When the value of dollar against other currencies falls, the demand for goods produced in the U.S. increases due to rise in demands by foreigners. As a result, the aggregate demand curve would shift rightward.
- It is because at the same price level foreigners can buy more goods however there is no change in demand by the people of the U.S.
- The argument that the shift would take place in the downward direction is certainly wrong. As the demand for domestic goods have increased the AD curve will shift rightward.
Conclusion:
Thus, the argument is wrong as the shift would take place in rightward direction.
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