Figure 36-8

-Which of the graphs in Figure 36-8 illustrates the AD-AS shifts induced by the foreign sector following an increase in the U.S.federal deficit?
A)1
B)2
C)3

Question

Figure 36-8
​ 
-Which of the graphs in Figure 36-8 illustrates the AD-AS shifts induced by the foreign sector following an increase in the U.S.federal deficit?
A)1 
B)2 
C)3

Quizplus · Accepted Answer

An increase in the U.S. federal deficit, often financed by borrowing, can lead to higher interest rates. Higher interest rates attract foreign capital, appreciating the domestic currency. This makes exports more expensive and imports cheaper, potentially reducing net exports. In the AD-AS model, this scenario is represented by a leftward shift of the aggregate demand curve, as shown in graph 1, where the aggregate demand decreases due to the reduced net exports.

Figure 36-8 ​

Figure 36-8