What are the economic effects of a currency appreciation?
A)It will decrease aggregate demand and aggregate supply, so that output will certainly fall, and prices may fall as well.
B)It will increase aggregate demand and aggregate supply, so that output will certainly rise, and prices may rise as well.
C)It will increase aggregate demand and decrease aggregate supply, so that prices will certainly rise, and output may rise as well.
D)It will decrease aggregate demand and increase aggregate supply, so that prices will certainly fall, and output may fall as well.

Question

Quizplus · Accepted Answer

Currency appreciation makes the exports of a country more expensive in foreign markets, which reduces demand for them and decreases the aggregate demand. At the same time, the appreciation makes imports cheaper, which increases the aggregate supply. As a result, prices are likely to fall, and output may also decrease. Therefore, D is the most suitable option.

What Are the Economic Effects of a Currency Appreciation