Final answer:
An increase in foreign real national income can lead to a rise in U.S. net exports, this event raises U.S. aggregate demand (AD), causing the AD curve to shift to the right. This shift indicates an increase in demand that typically leads to higher GDP and potentially an increase in price levels.
Step-by-step explanation:
When foreign real national income rises, it typically leads to an increase in demand for U.S. exports. The rise in exports would boost U.S. net exports (the difference between exports and imports, represented as X-M in the formula for aggregate demand). This increase in U.S. net exports would raise U.S. aggregate demand (AD), shifting the AD curve to the right. The rightward shift in the AD curve indicates higher demand for goods and services, which often results in an increase in real Gross Domestic Product (GDP) and potentially the price level, depending on the slope of the Aggregate Supply (AS) curve.
Existing conditions such as consumer confidence, business confidence, policy choices including changes in government spending, and taxes can influence shifts in aggregate demand. An outward shift in the AD curve results in a higher equilibrium quantity of output as well as a potential increase in price levels, signaling economic growth. However, it's important to note that the AD curve may shift to the left if these factors decrease, signaling a reduction in overall demand, which can lead to a lower equilibrium quantity of output and potential deflation.