Supposed that, initially, the U.S. economy was in an aggregate demand-aggregate
ID: 1251460 • Letter: S
Question
Supposed that, initially, the U.S. economy was in an aggregate demand-aggregate supply equilibrium at point A along the aggregate demand curve AD in the diagram in the next column. Now, however, the value of the U.S. dollar has suddenly appreciated relative to foreign currencies. This appreciation happens to have no measuralbe effects on either the short-run or the long-run aggregate supply curve in the United States. It does, however, influence U.S. aggregate demand.a. Explain how the dollar apprciation will affect U.S.net export expenditures.
b. Of the alternative aggregate demand curvess depicted in the figure-AD1 versus AD2 which could represent the aggregate demand effect of the U.S. dollar's appreciation? What effects does the appreciation have on real GDP and the price level?
c. What policy action might the Federal Reserve take to prevent the dollar's appreciation from affecting equilibrium real GDP in the short run?
Explanation / Answer
a) Dollar appreciation make U.S. goods more expensive to foreign countries so exports decrease. b) When exports decrease the AD curve moves in to the left, causing real GDP and the price level to drop. c) The Fed could increase the money supply (by, say, buying securities on the open market). This would cause a depreciation in the dollar and thus increase exports (also investment since interest rates will go down), bringing the AD curve back to the right and increasing GDP and the price level.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.