If the US dollar increases in value relative to the other major currencies, aggregate demand should?
american goods become relatively more expensive because the value of the US dollar increases relative to foreign currencies. lets say britain and us had the same exchange rate in 2016 where 1 pound = 1 dollar. a retired tourist from britain on a fixed income came here and sees that a big mac is 4.99 so he buys 1. next year in 2017, lets say that britains treasury fucks up and prints out a billion pounds thus causing inflation and reducing the value of a single pound. Now the exchange rate between the US and britain is something crazy like 1 dollar = 5000 pounds. that means 1 big mac, of 4.99 US dollars is now 25,000 pounds. Now going back to that same retired tourist on fixed income, do you think he's going to buy that big mac now? NO because demand for US goods decreases when the relative value of the US dollar increases.
Which one of the following is most likely to accompany a reduction in aggregate demand?
If there is a decrease in employment, there is less people with disposable income. therefore, there will be less people out there that have money to buy stuff. therefore aggregate demand is reduced. An increase in price can occur from either an outward shift in demand or an inward shift in supply. a reduction in demand would cause price levels to fall. just draw out your standard supply/demand graph where Price is on the y axis and quanity is on the x-axis.
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