The value of the dollar relative to other currencies is falling. We would predict ___.

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The value of the dollar relative to other currencies is falling.  We would predict ___.

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Question: The value of the dollar relative to other currencies is falling.  We would predict ___.

Option 1: "prices will fall and production will fall". This is inconsistent with a weakening dollar. When the dollar falls, imported goods become more expensive, which tends to push domestic prices up rather than down. The effect on production is also unclear in this option, but the downward pressure on prices is unlikely. Overall, this option misstates the price direction and thus is incorrect.

Option 2: "prices will fall and production will rise". As noted, a weaker dollar generally raises import costs, contributing to higher domestic prices, not lower. While export demand might boost production, the stated falling prices make this option internally inconsistent with the typical stimulus from a weaker currency. Therefore, this option is inaccurate.

Option 3: "prices will rise and production will fall". Rising prices are plausible with a weaker dollar, but production is unlikely to fall in this scenario because cheaper exports tend to stimulate production rather than shrink it. This option mixes an inflationary effect with a contractionary production outcome that doesn’t align with the usual demand-side response to a depreciation.

Option 4: "prices will rise and production will rise". A falling dollar tends to raise import prices and overall domestic price levels (inflationary pressure), while also making exports cheaper for foreigners, which tends to boost domestic production again through stronger external demand. This combination captures both the inflationary effect and the production-stimulating effect of a weaker currency, making it the most consistent with standard macroeconomic reasoning.

In sum, options 1, 2, and 3 fail to simultaneously align both the expected price and production responses to a depreciation of the dollar, whereas option 4 coherently reflects higher pricesvia import cost pressures and higher production via stronger export demand.

ECON 2002.01 AU2025 (21333) Midterm Exam 3 - Requires Respondus LockDown Browser

The value of the dollar relative to other currencies is falling. We would predict ___.

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