Aggregate Demand & Aggregate Supply Practice Question

Use an aggregate demand and aggregate supply diagram to illustrate and explain how each of the following will affect the equilibrium price level and real GDP:

Foreign income rises

If foreign income rises, then we would expect that foreigners would spend more money - both in their home country and in ours. Thus we should see a rise in foreign spending and exports, which raises the aggregate demand curve. This is shown in our diagram as a shift to the right. This shift in the aggregate demand curve cause Real GDP to rise as well as the price level.