ECONOMICS
AGGREGATE DEMAND
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
there is a decrease in foreign Real GDP
|
|
|
the exchange rate for the dollar depreciates
|
|
|
Both of the above
|
|
|
Neither of the above
|
Detailed explanation-1: -If the dollar depreciates (the exchange rate falls), the relative price of domestic goods and services falls while the relative price of foreign goods and services increases. 1. The change in relative prices will increase U.S. exports and decrease its imports.
Detailed explanation-2: -The direct effect of an exchange rate depreciation is to increase the price of imports relative to exports, which will tend to decrease the value of net exports (exports less imports) and widen the current account deficit.
Detailed explanation-3: -Net Exports and the Real Exchange Rate Thus, when the real exchange rate is high, net exports decrease as imports rise. Alternatively, when the real exchange rate is low, net exports increase as exports rise.
Detailed explanation-4: -When a country’s exchange rate increases relative to another country’s, the price of its goods and services increases. Imports become cheaper. Ultimately, this can decrease that country’s exports and increase imports.