When the exchange rate depreciates, the aggregate demand curve shifts to the right causing an increase in real GDP.

Question

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When the exchange rate depreciates, domestic goods become cheaper relative to foreign goods, leading to an increase in exports and a decrease in imports. This boosts aggregate demand, shifting the aggregate demand curve to the right, which can cause an increase in real GDP as domestic production rises to meet the higher demand.

When the Exchange Rate Depreciates, the Aggregate Demand Curve Shifts