When the value of the dollar increases, 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 increases, it makes imports cheaper and exports more expensive. This tends to decrease aggregate demand because domestic consumers can buy foreign goods more cheaply, and foreign consumers are less likely to buy domestic goods. It can increase short-run aggregate supply because the cost of imported inputs decreases, making it cheaper for businesses to produce goods and services.

When the Value of the Dollar Increases, the Net Effect