Suppose the U.S. economy is producing at the natural rate of output. A depreciation of the U.S. dollar will cause ________ in real GDP in the short run and ________ in inflation in the short run,everything else held constant. (Assume the depreciation causes no effects in the supply side of the economy. )
A)an increase;an increase
B)a decrease;a decrease
C)no change;an increase
D)no change;a decrease

Question

Quizplus · Accepted Answer

A depreciation of the U.S. dollar makes U.S. goods cheaper to foreigners and foreign goods more expensive to U.S. residents, increasing demand for U.S. goods. This leads to an increase in real GDP due to higher demand and an increase in inflation due to higher prices for imported goods and increased demand for domestic goods.