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


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.

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