Determinants of Aggregate Demand in an Open Economy How Real Exchange Rate Changes Affect the Current Account An increase in g raises eX and improves the domestic country's Ca Each unit of domestic output now purchases fewer units of foreign output, therefore, foreign will demand more exports An increase g can raise or lower IM and has an ambiguous effect on CA IM denotes the value of imports measured in terms of domestic output Copyright C 2003 Pearson Education, Inc Slide 16-9Copyright © 2003 Pearson Education, Inc. Slide 16-9 ▪ How Real Exchange Rate Changes Affect the Current Account • An increase in q raises EX and improves the domestic country’s CA. – Each unit of domestic output now purchases fewer units of foreign output, therefore, foreign will demand more exports. • An increase q can raise or lower IM and has an ambiguous effect on CA. – IM denotes the value of imports measured in terms of domestic output. Determinants of Aggregate Demand in an Open Economy