Figure 15-1

-Refer to Figure 15-1.Ceteris paribus,an increase in the growth rate of domestic GDP relative to the growth rate of foreign GDP would be represented by a movement from
A) AD₁ to AD₂.
B) AD₂ to AD₁.
C) point A to point B.
D) point B to point A.

Question

Figure 15-1
 
-Refer to Figure 15-1.Ceteris paribus,an increase in the growth rate of domestic GDP relative to the growth rate of foreign GDP would be represented by a movement from
A) AD₁ to AD₂. 
B) AD₂ to AD₁. 
C) point A to point B. 
D) point B to point A.

Quizplus · Accepted Answer

An increase in the growth rate of domestic GDP relative to the growth rate of foreign GDP would mean that domestic demand for foreign goods and services is increasing, while foreign demand for domestic goods and services is decreasing. This would cause the demand for foreign currency to increase and the demand for domestic currency to decrease. As a result, there would be an increase in the exchange rate and a shift from AD₂ to AD₁.

Figure 15-1 -Refer to Figure 15-1.Ceteris Paribus,an Increase in the Growth Rate