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15 August, 16:44

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?

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  1. 15 August, 17:07
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    It shifts to the left by $200 million at each price level

    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.
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