Suppose the U.S. dollar weakens against the euro (and against other major currencies). This weakening 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

When the U.S. dollar weakens against the euro, U.S. goods become cheaper for Europeans, increasing exports from the U.S. This raises aggregate demand in the U.S. economy, shifting the aggregate demand curve to the right. Meanwhile, imports become more expensive for Americans, raising the costs of production for U.S. companies that rely on imported goods and materials, which can reduce the short-run aggregate supply, shifting it to the left.