The exchange rate effect implies that a currency depreciation increases net exports and increases the quantity of goods and services demanded.

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BlackTom AI · Accepted Answer

The question presents a statement about the exchange rate effect and asks us to consider how a currency depreciation impacts two quantities.
First, restating the given assertion: a currency depreciation increases net exports and increases the quantity of goods and services demanded.
Since there are no answer options provided, I will analyze the two components of the statement separately.
Net exports: when a domestic currency depreciates, domestic goods become cheaper for foreign buyers and foreign goods become more expensive for domestic residents. This tends to raise exports and reduce imports, leading to an improvement in net exports (NX). Therefore, the claim that net exports increase is consistent with standard open-economy macroeconomics.
Quantity of goods and services demanded (aggregate demand): an increase in net exports raises overall spending on domestically produced goods and services. In the short run, this boost in NX tends to raise real GDP and the quantity demanded of goods and services. Hence, the claim that the quantity demanded increases is also supported by the exchange-rate effect.
Note that the strength of these effects can depend on factors such as the elasticities of demand for imports and exports, the responsiveness of investment to the economy, and the time horizon. In some cases, the pass-through of exchange rate changes to prices, or fiscal and monetary polices, can modify the magnitude, but the directional results—NX rising and higher demand for domestically produced goods—are the conventional outcome.
Because the prompt presents the two components together and suggests they both increase, and because each part aligns with the standard effects of depreciation in the Mundell-Fleming framework, the statement is described as true in this context.
If there were alternative options, a common incorrect alternative might claim that depreciation has no effect on net exports or that it reduces demand, which would contradict the mechanism described above. However, with the information given, the reasoning supports that both net exports and the quantity of goods and services demanded increase following a depreciation.

23115 Economics for Business - Autumn 2025 Assessed Quiz 6 - AD-AS Model

The exchange rate effect implies that a currency depreciation increases net exports and increases the quantity of goods and services demanded.

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