Final answer:
Increased exports shift the Aggregate Demand (AD) to the right, signifying higher demand and potential economic growth, while increased imports shift AD to the left, indicating lower demand for domestic goods and potential economic shrinkage.
Step-by-step explanation:
Exports and imports significantly influence the Aggregate Demand (AD) within the Aggregate Demand/Aggregate Supply (AD/AS) model. When exports increase, there is a higher foreign demand for a country's goods and services, which in turn increases the total demand within the economy. Therefore, increased exports shift AD to the right, indicating a potential rise in the equilibrium quantity of output and the price level.
Conversely, when imports increase, this indicates a rise in domestic demand for foreign goods and services. An increase in imports effectively reduces the demand for domestically produced goods, thereby lowering the total aggregate demand. As such, increased imports shift AD to the left, which could lead to a lower equilibrium quantity of output and lower price level, and may be recessionary if it falls below potential GDP.
Therefore, the correct answers to the student's question are:
- a) Increased exports, shift AD to the right
- b) Increased imports, shift AD to the left