A depreciation of the U.S.dollar in the foreign exchange market lowers U.S.Real GDP when the _____________ shift of the SRAS curve exceeds the __________ shift of the AD curve.

Question

Quizplus · Accepted Answer

A depreciation of the U.S. dollar in the foreign exchange market leads to a fall in the value of imports, an increase in the price of exports, and hence an increase in net exports. This results in a rightward shift of the AD (Aggregate Demand) curve. On the other hand, a leftward shift of the SRAS (Short-Run Aggregate Supply) curve would occur due to the increase in the price of imported inputs, which raises the costs of production and hence reduces the profitability of firms.

If the leftward shift of the SRAS curve exceeds the rightward shift of the AD curve, then the equilibrium point would shift to the left, leading to a fall in both Real GDP and the price level. This is because the increase in production costs would reduce the profitability of firms and hence their willingness to invest, leading to a fall in output, income, and employment. Therefore, option C is the correct choice.

A Depreciation of the U