Suppose that a partner country autonomously increases its demand for the home country's exports. With a fixed exchange system, this increase in export demand __________; with a flexible exchange rate system, this increase in export demand __________.
A) will shift the home country's AD curve to the right; also will shift the home country's AD curve to the right.
B) will shift the home country's AD curve to the right; will not shift the home country's AD curve.
C) will not shift the home country's AD curve; will shift the home country's AD curve to The right
D) will not shift the home country's AD curve; also will not shift the home country's AD Curve

Question

Quizplus · Accepted Answer

With a fixed exchange rate system, an increase in export demand from a partner country will result in an increase in demand for the home country's currency. This will lead to an increase in the supply of the partner country's currency and cause its value to depreciate, effectively lowering the cost of the home country's exports to the partner country. As a result, the home country's exports will increase, which will shift its AD curve to the right. However, with a flexible exchange rate system, the home country's currency will appreciate in response to the increase in export demand from the partner country, reducing the competitiveness of the home country's exports. Therefore, there will be no shift in the home country's AD curve.

Suppose That a Partner Country Autonomously Increases Its Demand for the Home