A currency depreciation
A)reduces aggregate demand and increases aggregate supply.
B)reduces aggregate demand and aggregate supply.
C)increases aggregate demand and reduces aggregate supply.
D)increases aggregate demand and aggregate supply.

Question

Quizplus · Accepted Answer

A currency depreciation makes the domestic currency weaker, making exports relatively cheaper and imports relatively more expensive. This leads to an increase in exports and a decrease in imports, thus increasing net exports. This increase in net exports leads to an increase in aggregate demand. On the other hand, a currency depreciation also leads to higher import prices, which can increase costs for domestic firms, reducing their profitability and ability to produce as much. This can lead to a decrease in aggregate supply. Therefore, a currency depreciation increases aggregate demand and reduces aggregate supply.

A Currency Depreciation