An exchange rate shock will tend to cause a _____ shift of the _____ curve.
A) rightward, AS
B) leftward, AS
C) increase, AD
D) large, AD
E) small, AD

Question

Quizplus · Accepted Answer

An exchange rate shock, such as a sudden appreciation or depreciation of the domestic currency, can affect the cost of imported goods and the competitiveness of exports. This can lead to changes in the aggregate supply (AS) curve. Specifically, if the domestic currency appreciates, making imports cheaper and exports more expensive abroad, it can lead to a leftward shift of the AS curve due to increased costs for domestic producers and reduced demand for exports. Conversely, a depreciation could have the opposite effect, but the question specifically mentions a shock, which typically implies a negative connotation, hence a leftward shift.

An Exchange Rate Shock Will Tend to Cause a _____