A currency appreciation is disinflationary and contractionary if the
A)inward shift of the aggregate demand curve due to the fall in exports exceeds the outward shift of the aggregate supply curve due to lower input prices.
B)outward shift of the aggregate demand curve due to the rise in exports exceeds the outward shift of the aggregate supply curve due to lower input prices.
C)outward shift of the aggregate demand curve due to the fall in exports exceeds the inward shift of the aggregate supply curve due to higher input prices.
D)inward shift of the aggregate demand curve due to lower input prices exceeds the outward shift of the aggregate supply curve due to the rise in exports.

Question

Quizplus · Accepted Answer

Currency appreciation leads to a fall in exports as the domestic goods become relatively more expensive in foreign markets. This causes an inward shift of the aggregate demand curve. On the other hand, currency appreciation leads to lower input prices as imported inputs become cheaper. This leads to an outward shift of the aggregate supply curve. If the inward shift of the aggregate demand curve due to the fall in exports exceeds the outward shift of the aggregate supply curve due to lower input prices, the overall effect is disinflationary (reduced inflation) and contractionary (reduced output and employment). Thus, option A is the correct choice.

A Currency Appreciation Is Disinflationary and Contractionary If the