Question

A depreciation of the U.S. dollar makes American goods cheaper relative to foreign goods, resulting in...

A depreciation of the U.S. dollar makes American goods cheaper relative to foreign goods, resulting in a ________ in net exports in the U.S. and a ________ shift of the IS curve in the U.S., everything else held constant.

Select one:

a. fall; leftward

b. rise; leftward

c. fall; rightward

d. rise; rightward

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Answer #1

A currency depreciation makes domestically produced goods of US cheaper in rest of the world. Other countries will start buying goods produced in US at cheaper rates. This will increase the Net Exports of US.

The IS curve shows optimal combinations of output and interest rate in a goods market

AD = C + I + G + NX

Increase in NX will increase AD. The national output will increase due to rise in Demand. As a result, the IS curve will shift rightward

So, option d. Is correct

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