In a two-country world,the appreciation of the domestic currency shifts

Question

Quizplus · Accepted Answer

Appreciation of the domestic currency means that it is stronger compared to the foreign currency, making the prices of domestic goods relatively more expensive for foreign buyers. This leads to a decrease in net exports (exports - imports), causing a leftward shift of the AD (aggregate demand) curve. On the supply side, the increase in prices of imported inputs reduces the profitability of production and therefore reduces the output and employment, leading to a rightward shift of the SRAS (short-run aggregate supply) curve. Therefore, the correct answer is B.

In a Two-Country World,the Appreciation of the Domestic Currency Shifts