A currency appreciation should
A)reduce net exports and therefore increase aggregate demand.
B)raise net exports and therefore decrease aggregate demand.
C)reduce net exports and therefore decrease aggregate demand.
D)raise net exports and therefore increase aggregate demand.

Question

Quizplus · Accepted Answer

A currency appreciation refers to an increase in the value of a country's currency relative to other currencies. This makes the country's exports more expensive and imports cheaper. As a result, a currency appreciation is likely to reduce net exports because export demand decreases while import demand increases.

Reduced net exports lead to a decrease in aggregate demand, as net exports are a component of the aggregate demand formula: AD = C + I + G + (X - M). Therefore, the correct answer is C: a currency appreciation should reduce net exports and therefore decrease aggregate demand.

A Currency Appreciation Should