Question

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.

Answer 1

The world economy can affect The U.S aggregate demand via foreign income and the foreign exchange rate. The aggregate demand of the U.S increases when its exports are cheaper to residents of the foreign countries. This happens only when the foreign exchange rate falls. However, imports of the U.S grow to be dearer to its citizens. Similarly, the aggregate demand of the U.S increases when some of the augmented income by the citizens of the foreign countries is spend on goods and services produced in U.S. But it can happen only if the foreign income increases.