Using the aggregate demand-aggregate supply model, explain how the depreciation

Question

Using the aggregate demand-aggregate supply model, explain how the depreciation of the US dollar in terms of foreign currencies would affect the economy.
State in what happens to the Aggregate demand curve, Aggregate supply curve, The price level, and The real GDP.

I said the AD curve shirts right as demand increases for domestic consumption (since imports are costlier), and because international firms find US goods cheaper. The aggregate supply curve would move to the left, since it costs more to produce these goods as the exchange rate is lower, and since there is an influx in overall demand causing shortages. The price level would go up since imported raw materials increase in cost to continue production.

I am a bit confused on the Real GDP. Could it go UP from the rise in domestic good demand, or would it go down due to dollar depreciation? Thanks again in advance for you help!

Explanation / Answer

Hi Momar! I am taking AP Economics, and we recently discussed this topic. When the US dollar depreciates, the value of US goods falls on the international market. Foreign countries see US goods as relatively cheap, so they import more (i.e., US exports increase and imports decrease). Or, you can think of it as US dollar depreciates, so US can buy less foreign stuff, decreasing imports. AD is made of C + I + G + X - M, so a decrease in M and an increase in exports should, like you said, shift AD curve to the right. The aggregate supply curve should not shift because none of its factors (price inputs, productivity, available resources) change. AD shifting to the right means price level and real GDP increase. Hope this helps!

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