Suppose the exchange rate falls from $1.20 Canadian per U.S. dollar to $1.10 Canadian per U.S. dollar. U.S. exports will ________, U.S. imports will ________, and U.S. aggregate demand will ________.
A) decrease; increase; decrease
B) decrease; increase; increase
C) increase; decrease; increase
D) increase; increase; increase

Question

Quizplus · Accepted Answer

When the exchange rate falls from $1.20 Canadian per U.S. dollar to $1.10 Canadian per U.S. dollar, it means the U.S. dollar has appreciated relative to the Canadian dollar. This makes U.S. goods more expensive for Canadians, leading to a decrease in U.S. exports. Conversely, Canadian goods become cheaper for Americans, leading to an increase in U.S. imports. The increase in imports and decrease in exports reduce the net export component of aggregate demand, thus increasing U.S. aggregate demand as consumers and businesses are likely to spend more on the now cheaper imported goods.

Suppose the Exchange Rate Falls from $1