A country decides to depreciate its currency. In the short run _____, but in the long run _____.

Question

Quizplus · Accepted Answer

Depreciating the currency will make exports cheaper and more attractive, leading to an increase in demand for exports and an increase in aggregate demand. However, this will also cause an increase in the cost of imported inputs, leading to a decrease in aggregate supply. In the long run, as the economy adjusts to the new exchange rate, prices will reach a new equilibrium, but the effects on exports and imports will persist.

A Country Decides to Depreciate Its Currency