Figure 13.2
-Refer to Figure 13.2.In a flexible exchange rate regime,if an economy is experiencing external disequilibrium at point B,then the domestic currency will:
A) depreciate, shifting the IS curve to the right.
B) depreciate, shifting the IS curve to the left.
C) appreciate, shifting the IS curve to the right.
D) appreciate, shifting the LM curve to the left.

Question

Figure 13.2 
-Refer to Figure 13.2.In a flexible exchange rate regime,if an economy is experiencing external disequilibrium at point B,then the domestic currency will:
A) depreciate, shifting the IS curve to the right. 
B) depreciate, shifting the IS curve to the left. 
C) appreciate, shifting the IS curve to the right. 
D) appreciate, shifting the LM curve to the left.

Quizplus · Accepted Answer

In a flexible exchange rate regime, if an economy is experiencing external disequilibrium at point B (assuming this point indicates a trade deficit or excess imports), the domestic currency will depreciate. This depreciation makes domestic goods cheaper for foreigners and foreign goods more expensive for domestic consumers, which increases exports and decreases imports, improving the trade balance. The depreciation effectively increases net exports, which is a component of aggregate demand. This increase in aggregate demand shifts the IS curve to the right.

Figure 13.2 -Refer to Figure 13.2.In a Flexible Exchange Rate Regime,if an Rate