Question

In the short-run, an depreciation in the value of the U.S. dollar will tend to cause...

In the short-run, an depreciation in the value of the U.S. dollar will tend to cause ________.

a decrease in the level of output and higher inflation

an increase in the level of output and higher inflation

a decrease in the level of output and lower inflation

an increase in the level of output and lower inflation

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Answer #1

In the short run, a depreciation in the value of the U.S. dollar would mean a decrease in the value of exports and an increase in the value of imports implying a decrease in the level of output. Also, there is an inverse relationship between the U.S. inflation rate and the trading partner's currency appreciation. Depreciation in the value of the US dollar would mean that goods and services are now costlier than earlier to purchase for the US. Thus, depreciation in the US dollar would mean an increase in inflation.

Thus, In the short-run, a depreciation in the value of the U.S. dollar will tend to decrease the level of output and higher inflation.

1st Option is the correct answer.

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