Question

Movements along the Aggregate Demand Curve versus Shifts of the Aggregate Demand Curve

​Germany, along with 18 other countries in​ Europe, uses the euro as its currency. According to an article in the Wall Street Journal​, in 2014 German net exports rose to "euro€217 billion​ ($246 billion), shattering the previous record of euro€195.3 billion set in​ 2007." The story quoted an economist working for a German bank as​ saying, "I think that due to the weaker euro we should get stronger​ exports."

(Source: Todd Buell and Bertrand​ Benoit, "Germany Enjoys Record Year for​ Trade," Wall Street
Journal​, February​ 9, 2015.)

a. At the time this article was​ written, what was the exchange rate between the U.S. dollar and the​ euro?

b. What does the economist mean by a​ "weaker euro"?

c. Why would a weaker euro cause an increase in German net​ exports?

d. Briefly explain whether a weaker euro will cause a shift in the aggregate demand curve of the German economy or a movement along the aggregate demand curve.

Answer 1

a. The exchange rate on 9th February 2015 was 1$ = 0.883734 Euro

b. According to the Economist, the weaker Euro means it has depreciated against the dollar. Meaning one has to pay more Euros in order to get one dollar.

c. Weaker Euro would cause an increase in Germany's net exports because exporters in Germany are getting more Euro's in exchange for the goods they are exporting. Thus the incentive to produce goods and export it to US increases. At the same time imports from US would reduce as it turns expensive.

d. Demand curve shifts when there is more spending on exports. Movement along the demand curve is caused by changes in the price level. Thus a weaker euro will cause a shift in the aggregate demand curve to the right.

answered by: anonymous