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Q. Describe Exports and imports in AS-AD model?
Exports and imports. This is more difficult to justify owing to exchange rate. Suppose that we have a flexible exchange rate and that price level is constant in foreign country. Say that P increases by 10%. It is reasonable to presume that exchange rate will then depreciate by 10%. The price of domestically produced goods in foreign market will then be unaffected (in their currency) and so will exports. Because of the depreciation of exchange rate, price of imported goods will increase by 10% as well it makes sense to presume that demand for real imports will not change.
It is significant to understand that P may affect YD indirectly in AS-AD model. P doesn't affect YD directly if we keep Y and R constant. However P may very well affect R and/or Y and thus indirectly affect YD. As a matter of fact this is exactly what would happen in AS-AD model.
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