What happens to aggregate demand when the dollar depreciates?and what happens when households expect lower prices in the future?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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When the dollar depreciates against foreign currencies, exports should increase and imports should decrease.  This is because our products get cheaper for foreigners and their products get to me more expensive for us.

In such a case, there gets to be increased demand for American products.  That means that aggregate demand goes up.

If households expect lower prices (I assume for all goods and services) in the future, AD goes down because people will wait to buy until the prices actually do drop.  In other words, if you think the car that you can buy for $25,000 is going to cost $20,000 in 6 months, you really ought to wait if you can.

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