Why???

CFA Level I Economics
#1

Which of the following is most likely to cause an increase in aggregate demand?

A) Relative appreciation in the country’s currency. B) An increase in the general price level. C) High capacity utilization rates.

Surely the ansswer is A. More imports, more demand.

#2

Hi.

So firstly,

Aggregate Demand = Consumption + Investment + Government Spending + Net Exports

= Consumption + Investment + Government Spending + (Exports - Imports)

In Symbols, AD = C + I + G + (X -M) where X= Exports and M = Imports

The choices:

A) Relative Appreciation in a country’s currency => Imports increase => Reduces Net Exports => AD decreases

B) An increase in the general price level = > reduces purchasing power = > reduces AD

C) High Capacity Utilisation => Firms produce more output in response to strong demand => Aggregate Income increases => Consumption increases = >AD increases

So choice “C” seems to be correct.

#3

Thanks, all makes sense now.