What are the two channels through which the world economy can affect U.S. aggregate demand? State what changes in the world economy can increase U.S. aggregate demand
What will be an ideal response?
The world economy can affect aggregate demand through the foreign exchange rate and foreign income. If the foreign exchange rate falls, then U.S. aggregate demand increases because U.S. exports become cheaper to foreign residents while U.S. imports become more expensive to U.S. citizens. If foreign income increases, then U.S. aggregate demand increases because foreign citizens will spend some of their increased income on U.S.-produced goods and services.
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