Final answer:
When the dollar appreciates in value relative to foreign currencies, it causes a decrease in aggregate demand. This happens because U.S. goods become more expensive for foreign buyers, leading to reduced exports and increased imports.
Step-by-step explanation:
If the dollar appreciates in value relative to foreign currencies, it affects the economy in multiple ways. When the dollar strengthens, U.S. goods become relatively more expensive for foreign buyers, which tends to decrease demand for these products abroad. This results in a decrease in foreign demand for U.S. exports, while imports become relatively cheaper for U.S. buyers, potentially increasing the quantity of imports. Thus, such an appreciation of the dollar would lead to an overall decrease in aggregate demand, as lower exports and higher imports reduce net external demand.
According to Table 12.1, the Determinants of Aggregate Demand, among other factors, changes in the relative price level are important. A higher relative price of U.S. goods in the international market would discourage exports and encourage imports, thus reducing aggregate demand.