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

What will be an ideal response?

ANSWER:

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.