Final answer:
An exogenous decrease in investment demand shifts the IS curve left in the IS-LM model, indicating lower demand and output, and can potentially lead to a recession. Decreased interest rates might stimulate investment, increased exchange rates might hurt exports, and decreased output levels could intensify recessionary pressures. These scenarios reflect reactions to the decrease in investment demand.
Step-by-step explanation:
The student's question relates to the economic concepts of investment demand and its influence on macroeconomic indicators such as interest rates, exchange rates, and output levels, within the IS-LM-FX model framework. When the economy experiences an exogenous decrease in investment demand, the IS curve in the IS-LM model would shift to the left. This leftward shift indicates a decrease in overall demand, which typically results in a lower equilibrium level of income and output (GDP), potentially leading to a recessionary gap.
If we consider the effects on the economy of decreased interest rates (A), in theory, this would increase investment as borrowing costs are lower, potentially offsetting some of the contractionary effects of the initial decrease in investment demand. In terms of increased exchange rates (B), this could negatively impact net exports as domestic goods become more expensive for foreign buyers, exacerbating the decrease in output. If the economy already experiences decreased output levels (C), the drop in investment demand would further reduce GDP, deepening the recessionary pressures.
Note that the scenarios provided (A, B, C) are outcomes of the initial shock to investment demand, not necessarily the causes of the shock itself, and therefore 'none of the above' (D) would not be considered an answer to the posed question. Instead, each scenario outlines a different aspect of the economic reaction to a drop in investment demand, as seen in the IS-LM-FX model's shifts and resulting equilibria.