When the value of the dollar decreases, the net effect on the economy
A) will be an increase in short-run aggregate supply and a decrease in aggregate demand.
B) will be decrease in short-run aggregate supply and an increase in aggregate demand.
C) will be an increase in both aggregate demand and aggregate supply.
D) will be a decrease in both aggregate demand and aggregate supply.

Question

Quizplus · Accepted Answer

When the value of the dollar decreases, it becomes less valuable internationally and imports become more expensive. This leads to a decrease in short-run aggregate supply as the cost of production increases for businesses. Additionally, exports become more attractive to foreign buyers, leading to an increase in aggregate demand as more goods are being produced for export. Therefore, the net effect is a decrease in short-run aggregate supply and an increase in aggregate demand.

When the Value of the Dollar Decreases, the Net Effect