Question

Suppose net exports decreases by $100 million due to a slump in foreign economies. If the value of the multiplier is 2, what happens to the domestic aggregate demand curve?

Answer 1

It shifts to the left by $200 million at each price level

Step-by-step explanation:

Given that,

Multiplier = 2

Net exports decrease by $100 million

Change in aggregate demand is calculated as follows:

Multiplier = Change in Aggregate Income (ΔY) ÷ Change in Exports (ΔX)

2 = ΔY ÷ (-$100)

ΔY = -$200

Therefore, the national income will fall by -$200 and hence the aggregate demand will fall by -$200 . Hence, the aggregate demand curve will shift to the left.