Answer to Question #221418 in Macroeconomics for Hassan

Question

As a result of a decrease in the value of the dollar in relation to other currencies, American imports decrease and exports increase. Consequently, there is a(n):

a.
decrease in the quantity of aggregate output supplied in the short run.

b.
increase in short-run aggregate supply.

c.
decrease in the quantity of aggregate output demanded.

d.
increase in aggregate demand.

Answer 1

The market equilibrium refers to the situation when the aggregate demand is exactly equal to the aggregate supply in the economy. The aggregate demand is downward sloping curve, whereas the aggregate supply is upward sloping curve.

The short run market equilibrium is when the aggregate demand (AD) is equal to the short run aggregate supply (SRAS). The long run market equilibrium is when (AD), (SRAS), and long run aggregate supply (LRAS) are equal. The SRAS is upward sloping but LRAS is a vertical line.

 

If the value of dollar decreases, then it means that dollar is relatively cheaper. It implies that domestic goods and services, denominated in dollar, is relatively cheaper now. Also, the foreign goods and services are relatively expensive because more dollar is require to get one unit worth of foreign goods or services. This means that there will be an increase in exports and a decrease in imports, which will result in an increase in the net exports (exports - imports). This increase in net exports will lead to an increase in AD. It is because the four components of AD are: Consumption expenditure, Investment expenditure, Government expenditure, and Net exports.

Option a is incorrect because a change in net exports don't directly affect the supply side in the economy.

Option b is incorrect because a change in net exports reflects the change in consumption spending of the people and supply takes time to accordingly adjust.

Option c is incorrect an increase in net exports will lead to an increase in the AD because net exports is one of the 4 components of AD.

Thus, only d is the only correct option.