Assuming flexible prices, if the currency depreciates more than anticipated, then equilibrium output should _____ and the equilibrium price level should _____ in the short run.
A) rise, rise
B) rise, fall
C) fall, rise
D) fall, fall

Question

Quizplus · Accepted Answer

When a currency depreciates more than anticipated, it makes domestic goods cheaper for foreigners, leading to an increase in exports. This boosts the domestic economy, increasing equilibrium output. Additionally, the cost of imports rises, contributing to an overall increase in the price level.

Assuming Flexible Prices, If the Currency Depreciates More Than Anticipated