A currency depreciation affects total spending in the short run through expenditure switching, but the net external wealth effect also can influence:
A) other types of expenditure such as consumption or investment.
B) the ability of the nation to keep up technologically, since new capital will be more expensive.
C) the production function of the home country.
D) the ability of the government to conduct monetary policy.

Question

Quizplus · Accepted Answer

A currency depreciation affects total spending in the short run through expenditure switching, which means that domestic consumers will switch their spending from foreign goods to domestic goods because foreign goods have become relatively more expensive. This leads to an increase in domestic spending on domestic goods. Additionally, a currency depreciation affects other types of expenditure such as consumption or investment since it will make imports more expensive and exports cheaper. This can lead to a shift in the allocation of resources towards sectors that rely heavily on domestic production or towards sectors that produce goods for export.

A Currency Depreciation Affects Total Spending in the Short Run