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 price levels fall

If foreign price levels fall, then foreign goods become cheaper. We should expect that consumers in our country are now more likely to buy foreign goods and less likely to buy domestic made products. Thus the aggregate demand curve must fall, which is shown as a shift to the left. Note that a fall in foreign price levels also causes a fall in domestic price levels (as shown) as well as a fall in Real GDP, according to this Keynesian framework.