6.5 Changes in the Foreign Exchange Market and Net Exports
Depreciation makes exports cheaper for foreigners and imports pricier at home, so net exports rise; appreciation lowers net exports.
Exchange-rate changes feed straight into net exports. When a currency DEPRECIATES, that country's goods become cheaper for foreigners (exports rise) while foreign goods become more expensive at home (imports fall) — so net exports increase. Appreciation runs the chain in reverse and net exports fall.
Net exports are a component of aggregate demand, so the chain continues: depreciation → net exports up → AD shifts right → real output and the price level rise. This is how foreign-exchange shocks transmit into the domestic AD-AS model.
The full FRQ chain often starts with policy: expansionary monetary policy → lower U.S. interest rates → dollar depreciates → U.S. net exports rise — reinforcing the domestic stimulus. Write every arrow; skipped links lose points even when the final answer is right.
Key terms for 6.5
Drag the curves yourself — the fastest way to make 6.5 stick.
Reversing the sign: a WEAKER currency helps net exports. Depreciation makes your goods cheaper abroad, so exports rise, imports fall, and net exports increase.
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