Question

The wide-spread recessions of 2007-2009 caused a reduction in German exports and reduction in net exports for Germany, shifting the German aggregate demand curve. Which of the following factors would also cause a reduction in Germany’s net exports and shift Germany’s aggregate demand curve?
A) real GDP in Germany increasing faster than real GDP in other countries
B) a decrease in the exchange rate of the Euro relative to other currencies
C) a decrease in the price level in Germany
D) an increase in the price level in Germany

Answer 1

A Decrease in exchange rate of the euro relative to other currencies means that the Euro has Appreciated.

Appreciation of Euro will make the German goods more expensive to the rest of the world(of course, to countries outside Eurozone) and make goods from rest of the world relatively cheaper for the Germans. This would lead to a Decrease in German exports and an increase in German imports. Hence, This will lead to a reduction in the Germany's net Exports. As a result of a Decrease in the net Exports of Germany, Germany's Aggregate Demand curve shifts to the left.

Hence, a decrease in the exchange rate of the euro relative to other currencies would lead to a reduction in Germany's net Exports and shift Germany's aggregate demand curve.

Therefore, option B is correct.