If the U.S. price level increased relative to price levels in foreign countries, what would be the impact on domestic aggregate supply and aggregate demand curves?
A) the aggregate supply curve would shift outward and the aggregate demand curve would remain unchanged
B) the aggregate supply curve would shift inward and the aggregate demand curve would remain unchanged
C) the aggregate demand curve would shift outward and the aggregate supply curve would remain unchanged
D) the aggregate demand curve would shift inward and the aggregate supply curve would remain unchanged
E) the domestic aggregate demand and supply curves would remain unchanged

Question

Quizplus · Accepted Answer

If the U.S. price level increased relative to price levels in foreign countries, domestic goods would become relatively more expensive and foreign goods would become relatively cheaper. This would lead to a decrease in aggregate demand for domestic goods and an increase in aggregate demand for foreign goods. As a result, the aggregate demand curve would shift inward. On the other hand, the increase in the price level would make it less expensive for domestic producers to produce goods which would lead to an increase in domestic aggregate supply. As a result, the aggregate supply curve would shift outward. Therefore, the correct answer is D.

If the US Price Level Increased Relative to Price Levels in Foreign