Suppose that last year $1 U.S. exchanged for 1.2 euros. If this year $1 exchanges for 1.3 euros, then we can conclude that

Question

Quizplus · Accepted Answer

An increase in the exchange rate (from 1.2 to 1.3 euros per dollar) means the dollar is stronger this year than it was last year. A stronger dollar will make U.S. exports more expensive and imports cheaper, which will reduce net exports and shift the aggregate demand curve to the left. However, this question is asking about the short-run aggregate supply (SRAS) curve, which represents the relationship between the price level and the quantity of goods and services supplied in the short run. The exchange rate does not directly affect the SRAS curve, so neither answer A nor B makes sense. Answer D is correct because a stronger dollar will reduce the costs of imported inputs and make production cheaper, leading to a lower price level and a greater quantity of output supplied in the short run. This is represented by a rightward shift of the SRAS curve.

Suppose That Last Year $1 U