a. Suppose that the US dollar appreciates
.
Consider the two effects of a stronger
dollar.
1.) aggregate demand curve shift to.
the left: With a stronger dollar, exports become more expensive for other countries. As a result, demand for US exports decreases, leading to a leftward shift of the aggregate demand curve. This reduction in demand can lead to a decrease in output and employment in export-oriented industries.
2.) Reduction in prices: With a stronger dollar, foreign currency becomes cheaper for US importers. This leads to a decrease in the price of imported goods and services, as well as in the prices of domestically produced goods that compete with imports. This reduction in prices can lead to an increase in consumer purchasing power and, potentially, an increase in consumer spending.
Overall, the two effects of a stronger dollar can have a mixed impact on the economy, as the decrease in demand for exports could offset the reduction in prices. It may also lead to a decrease in inflation. The overall effect will depend on the magnitude of these two effects and other factors affecting the economy.
the SRAS curve shift
The Short-Run Aggregate Supply (SRAS) curve can shift due to various factors that affect the cost of production or the level of supply in the economy. Some possible factors that can shift the SRAS curve include:
1. Changes in input prices: An increase in the price of inputs such as labor or raw materials will raise the cost of production and shift the SRAS curve to the left. Conversely, a decrease in input prices will lower the cost of production and shift the SRAS curve to the right.
2. Changes in productivity: An increase in productivity will decrease the cost of production and shift the SRAS curve to the right. A decrease in productivity will increase the cost of production and shift the SRAS curve to the left.
3. Changes in technology: Advances in technology can increase productivity and shift the SRAS curve to the right.
4. Changes in expectations: If firms expect prices to rise in the future, they may increase production and shift the SRAS curve to the right in the short run.
5. Changes in government regulations: Changes in regulations such as taxes or subsidies can affect the cost of production and shift the SRAS curve.
The direction of the shift of the SRAS curve depends on the nature of the change and whether it increases or decreases the cost of production or the level of supply in the economy.
should the the SRAS curve shift downward due to a stronger dollar
It is not necessarily true that the SRAS curve would shift downward due to a stronger dollar. In fact, a stronger dollar may actually shift the SRAS curve upwards.
A stronger dollar can lead to lower import prices, which can reduce the cost of production for firms that use imported inputs. This decrease in input costs can lead to an increase in profitability and potentially shift the SRAS curve to the right.
Additionally, a stronger dollar can lower inflationary pressures in the economy, leading to lower inflation expectations and allowing the central bank to keep interest rates lower. Lower interest rates can stimulate investment and consumption, leading to higher aggregate demand and potentially shifting the SRAS curve to the right.
However, it is important to note that the direction of the SRAS curve shift due to a stronger dollar depends on a range of factors and is not necessarily clear-cut.
b. Suppose that the curves shifted by the same proportion. In this case the result would be that
Part 5
A.
the price level decreases
and real GDP remains at the original level.
B.
the price level decreases
and the real GDP decreases.
C.
both the price level and real GDP decrease.
D.
both the price level and real GDP increase.
If the AD and SRAS curves shift by the same proportion, the result would be that the price level decreases, but the effect on real GDP would depend on the direction of the shift.
If the shift is an increase in AD and an increase in SRAS by the same proportion, it would lead to an increase in both the price level and real GDP. Conversely, if the shift is a decrease in AD and a decrease in SRAS by the same proportion, it would lead to a decrease in both the price level and real GDP.
However, if the shift is an increase in AD and a decrease in SRAS, or a decrease in AD and an increase in SRAS by the same proportion, the effect on real GDP would be ambiguous and would depend on the magnitude and direction of the shifts.
Therefore, the correct answer to the question depends on the specific nature and direction of the shifts, and none of the given options are necessarily correct.