Suppose the U.S. dollar gains strength against the euro (and against other major currencies). This strengthening of the dollar will cause which of the following to occur?
A) The aggregate demand curve will shift to the right and the short-run aggregate supply will shift to the right.
B) The aggregate demand curve will shift to the left and the short-run aggregate supply will shift to the right.
C) The aggregate demand curve will shift to the right and the short-run aggregate supply will shift to the left.
D) the aggregate demand curve will shift to the left and the short-run aggregate supply will shift to the left.

Question

Quizplus · Accepted Answer

A strengthening of the dollar will make U.S. goods and services more expensive relative to foreign goods and services, leading to a decrease in net exports. This will shift the aggregate demand curve to the left. Additionally, a strengthening of the dollar will make imports cheaper, which will shift the short-run aggregate supply curve to the right as firms will be able to produce goods at a lower cost.