Question

Assume that the economy is currently in short run equilibrium. What will happen if the dollar appreciates in the foreign exchange market?

1) Aggregate demand will decrease
2) Aggregate supply will decrease
3) Aggregate demand will increase
4) Aggregate supply will increase

Answer 1

A lower U.S. dollar stimulates aggregate demand and affects the short-term aggregate supply curve.

Step-by-step explanation:

A lower U.S. dollar would stimulate aggregate demand by making exports cheaper and imports more expensive. It would mean higher prices for imported inputs throughout the economy, shifting the short-term aggregate supply curve to the left. The result could be a burst of inflation and, if the Federal Reserve were to run a tight monetary policy to reduce the inflation, it could also lead to recession.