Final answer:
The foreign purchases effect describes the impact of changes in net exports on a country's aggregate demand. An increase in exports relative to imports shifts the AD curve rightward, while an increase in imports relative to exports shifts it leftward.
Step-by-step explanation:
The foreign purchases effect describes how an increase in foreign purchases of a country's goods and services leads to an increase in the net exports component of that country's aggregate demand (AD), thus shifting the AD curve rightward. Conversely, an increase in a country's purchases of foreign goods and services over its exports (more imports than exports) would have the opposite effect, decreasing the net exports component and shifting the AD curve leftward.
According to the given information and examples, an increase in net exports, as seen in Mexico, Japan, and Germany, results in their respective AD curves shifting to the right, thereby increasing both the real GDP and the price level. If, on the other hand, exports fall, as in the case of the U.S. example provided, the AD curve shifts to the left, leading to a reduction in both price level and real GDP.
In summary, the foreign purchases effect can either shift the aggregate demand curve rightward, if foreign purchases of a country's exports increase, or leftward, if there is an increase in the country's imports relative to its exports.