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Assume that the U.S. is the domestic country, and Sweden is the foreign country. What will...

Assume that the U.S. is the domestic country, and Sweden is the foreign country. What will happen to the U.S. DD curve if inflation in the U.S. is 4%, but inflation in Sweden is 2%? Explain.

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Answer #1

Answer : When inflation level increase then consumers' purchasing power decrease. This means that when price level increase then consumers get less quantities of goods and services in compared to the situation of before increasing inflation level. As a result, the aggregate demand decrease which shift the demand curve (DD curve) to leftward.

Here U.S. inflation rate is greater than the Sweden inflation rate. For this reason the demand will decrease more in U.S. in compared to Sweden. As a result, the DD curve in U.S. will shift more to leftward in compared to Sweden.

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