Explain what happens to aggregate demand if the dollar depreciates relative to foreign currencies.

Expert Answers

An illustration of the letter 'A' in a speech bubbles

All other things being equal, if the dollar depreciates relative to foreign currencies, Americans will buy fewer imports and foreigners will buy more goods and services that are exported from the US.  This is because a weaker dollar makes American goods cheaper for foreigners and foreign goods more expensive for Americans.  If this happens, aggregate demand for American products will increase.  Fewer imports means that more Americans are buying domestic goods while more exports means that more American goods are being sold overseas.  In both cases, aggregate demand for American goods goes up.

Approved by eNotes Editorial Team

We’ll help your grades soar

Start your 48-hour free trial and unlock all the summaries, Q&A, and analyses you need to get better grades now.

  • 30,000+ book summaries
  • 20% study tools discount
  • Ad-free content
  • PDF downloads
  • 300,000+ answers
  • 5-star customer support
Start your 48-Hour Free Trial