Explain what factors cause shifts of the aggregate demand curve in the open economy model.

What will be an ideal response?


The standard of list of determinants that appeared for the closed economy version of the AD relation still exists here (e.g. G, T, … ). There are several international variables that must be added: Y*, E, P* and, in a fixed exchange rate regime, i*. The domestic price level also affects AD because of its effect on the real exchange rate.