Scenario 33-1

Question

Suppose that political instability in other countries makes people fear for the value of their assets in these countries so that they desire to purchase more U.S assets.

Refer to Scenario 33-1. What would the change in the exchange rate make happen to U.S. net exports and U.S. aggregate demand?
a. Net exports would rise which by itself would increase U.S. aggregate demand.
b. Net exports would rise which by itself would decrease U.S. aggregate demand.
c. Net exports would fall which by itself would decrease U.S. aggregate demand.
d. Net exports would fall which by itself would increase U.S. aggregate demand.

Answer 1

In the given scenario, the desire for individuals to purchase more U.S. assets due to political instability in other countries indicates an increase in demand for the U.S. dollar. As people convert their currency to the dollar to make these purchases, the value of the U.S. dollar will appreciate relative to other currencies.

When the U.S. dollar appreciates, U.S. exports become more expensive for foreign buyers, leading to a decrease in U.S. exports. At the same time, imports become cheaper for U.S. consumers, resulting in an increase in imports. This combination of rising imports and falling exports results in a decrease in U.S. net exports.

Given that net exports are a component of aggregate demand, a decrease in net exports would lead to a decrease in U.S. aggregate demand.

Therefore, the correct answer is:

c. Net exports would fall which by itself would decrease U.S. aggregate demand.