Suppose the U.S. economy is producing at the natural rate of output. A depreciation of the U.S. dollar will cause ________ in real GDP in the short run and ________ in inflation in the long run,everything else held constant. (Assume the depreciation causes no effects in the supply side of the economy. )
A)an increase;an increase
B)a decrease;a decrease
C)no change;an increase
D)no change;a decrease

Question

Quizplus · Accepted Answer

A depreciation of the U.S. dollar makes U.S. goods cheaper to foreigners and foreign goods more expensive to U.S. residents, leading to an increase in exports and a decrease in imports. This boosts demand for U.S. goods, increasing real GDP in the short run. Over time, the increased demand can lead to higher prices, resulting in inflation in the long run.