Explain how exchange rates affect the level of aggregate economic activity and the price level. Use appropriate AS/AD diagrams to illustrate your answer
A currency appreciation will shift AD inward and shift AS outward. Economists think that the AD effect is larger in magnitude than the AS effect. The net effect on the economy is lower inflation, lower real output, and higher unemployment. A currency depreciation will shift AD outward and shift AS inward. Assuming the AD effect is larger than the AS effect, the economy will experience higher inflation, higher real output, and lower unemployment.
You might also like to view...
Why would the establishment of a system of weights and measures and inspections by government help market function? Discuss in terms of the market for gasoline
Please provide the best answer for the statement.
Use the following graph to answer the next question.
A shift from AD2 shifts to AD1 would be consistent with what economic event in U.S. history?
A. cost-push inflation in the mid-1970s B. Great Recession of 2007-2009 C. World War II in the 1940s D. demand-pull inflation in the late 1960s