The equilibrium price levels in nations that are recipients of large inflows of funds from migrants will likely
A. rise because there is a decrease in the short run aggregate supply in these countries.
B. be unchanged because although people in the less developed nations buy more goods, there will be fewer exports.
C. fall because the fall in exports will be greater than the rise in consumption.
D. rise because there is an increase in the aggregate demand in these countries.
The correct answer and explanation is:
The correct answer is D. rise because there is an increase in the aggregate demand in these countries.
When migrant workers send funds back to their home countries, the increased flow of money generally leads to an increase in the income of households. This additional income tends to increase consumption and spending on goods and services, raising the overall demand for these goods. As the demand for goods and services rises, businesses may struggle to meet the heightened demand at the current price levels, which creates upward pressure on prices.
The effect on aggregate demand is important here. Aggregate demand is the total demand for goods and services in an economy at various price levels, and it consists of consumption, investment, government spending, and net exports. In this case, the influx of remittances acts as an increase in consumption, which shifts the aggregate demand curve to the right. As demand increases, firms may raise their prices to match the growing consumption, which leads to a rise in the equilibrium price level.
Although there may be some offsetting effects, such as a potential reduction in exports if resources are redirected toward domestic consumption, the overall impact on the domestic economy tends to be an increase in demand rather than a decrease. Thus, the net effect on the price level will generally be an increase.
In summary, large inflows of funds from migrants lead to an increase in aggregate demand due to higher household incomes, which causes the equilibrium price levels to rise as businesses respond to the increased demand by raising prices.