Output and the Exchange Rate in the Short Run...

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Output and the Exchange Rate in the Short Run

C h a p t e r 1 7

To accompany

International Economics, 3e by Sawyer/Sprinkle

PowerPoint slides created by Jeff Heyl

Publishing as Prentice Hall

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CHAPTER ORGANIZATION

Introduction

Aggregate Demand and Aggregate Supply: A Review

Determinants of the Current Account

Exchange Rate Changes and Equilibrium Output in an Open Economy

Summary

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How can we analyze the short-run of an open economy?

What are the impacts on a country’s imports and exports from changes in the real exchange rate?

Present a general model of output and price determination in an open economy

How much effect do changes in foreign trade have on growth rate of GDP?

What is the importance of the real exchange rate in an open economy? Its effect on output and output composition?

INTRODUCTION

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

Aggregate Demand

Aggregate demand is the relationship between total quantity demanded of goods and services in all sectors of the economy and the price level, holding all else constant

The axis are total output of goods and services measured by real GDP and the price level measured by GDP price deflator

The aggregate demand curve slopes downward to the right

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

Figure 17.1 The Aggregate Demand Curve

Price Level (P)

Real GDP (Y)

Aggregate Demand (AD)

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

The aggregate demand curve does not behave in the same manner as an ordinary demand curve

If the price of a single product falls, the consumer’s real income rises increasing the amount consumed for a normal good (income effect)

The lower price induces consumers to purchase more of the product because it’s cheaper (substitution effect)

Neither the income or substitution effect are relevant to overall price level

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

If the aggregate price level falls, prices consumers pay are falling and prices people receive as wages, rents, etc. are falling

Therefore, there is no income effect (no change in demand as the price level falls)

The price level is a measure of prices in general, not a particular price

As price levels fall there is no substitution effect (because prices in general are falling, not the price of a particular good)

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

This means the aggregate demand curve is negatively sloped for different reasons:

As the price level rises, interest rates increase, the interest rate effect

This is because MD will increase, holding MS constant, so equilibrium interest rates in the money market will increase

Higher interest rates curtail business investment and consumer spending on items such as housing and cars

As the price level increases, aggregate quantity demanded falls, and vice versa

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

As the price level changes, it impacts a country’s total exports and imports, the international substitution effect

As the price level increases, the price of domestically produced goods rises relative to foreign produced goods

Foreign demand for domestically produced goods (exports) declines and domestic demand for imported goods (imports) increases

As the price level increases, aggregate quantity demanded falls, and vice versa

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

Changes in Aggregate Demand

Changes in the determinants of the aggregate demand (previously held constant) will cause the curve to shift

The new AD curve shows that at any given price level, society wants to buy more (or less) goods and services

To analyze the shifts we can use the expenditure approach to calculating GDP (Ch12)

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

Figure 17.2 Changes in Aggregate Demand

Price Level (P)

Real GDP (Y)

AD”

AD’

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

There are four different sectors of an open economy that buy real goods and services; public consumption (C), business investment and public spending on housing (I), government spending (G), and exports and imports (X-M)

Changes in any of these factors shifts the AD curve

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

The largest component of aggregate demand is generally consumption (C)

Public consumption can change for a number of reasons not related to the price level

Changes in consumer expectations about the course of economic events can change current consumption

The more confident consumers are about the future, the more likely they are to consume today

This would shift the AD curve to the right

Lower confidence levels would shift the curve to the left

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

The degree of consumer indebtedness also effects consumption and aggregate demand

High levels of indebtedness from past consumption financed by borrowing must be paid off and consumers may need to reduce current consumption

As consumer spending falls, the AD curve shifts left

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

The government can affect consumption and aggregate demand by adjusting the level of taxes

Higher taxes (or lower transfer payments) reduce society’s after tax income

The lower income leads to lower consumption spending and the AD curve shifts to the left

Of course, lower taxes (or higher transfer payments) increase after tax income, thus consumption, and the AD curve shifts to the right

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

Investment spending (I) is even more unstable than consumption spending

Investment spending is sensitive to higher interest rates

If interest rates change, holding price levels constant (as in Ch15), aggregate demand will change as investment responds to interest rate changes

Higher interest rates tend to decrease business and housing investment (shift AD left) and lower interest rates tend to increase it (shift AD right)

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

As economic conditions change, expectations of future economic conditions generally change in the same direction causing a change in investment spending

The government can also change the level of business taxation

Increases or decreases in the level of business taxes tend to raise or lower investment spending

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

Government spending (G) can also influence the level of aggregate demand

As government spending on goods and services increases, aggregate demand increases

The opposite is also true

Government spending at federal, state or local level in most countries is a sufficiently large component of total spending and has a noticeable impact on aggregate demand even when spending changes are small

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

Aggregate demand may change because of changes in exports (X) and imports (I)

These are caused primarily by changes in incomes and the exchange rate

Exports are very sensitive to change in incomes in foreign countries

As foreign incomes increase, exports from the U.S. tend to increase which increases aggregate demand

As foreign incomes decline, exports fall and aggregate demand decreases

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

The faster the economic growth in the rest of the world, the greater will be the change in U.S. aggregate demand

Movements in the real exchange rate can also affect the level of exports and imports

As the dollar depreciates, a unit of foreign currency will buy more U.S. goods and a dollar will buy fewer foreign goods

This causes a change in aggregate demand

As exports and imports are a relatively small part of the U.S. GDP, this is a trivial effect

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

Table 17.1 Determinants or Factors that Shift the Aggregate Demand Curve

Change in Consumption Spending

Change in Consumer Wealth

Change in Consumer Expectations

Change in Consumer Indebtedness

Change in Taxes

Change in Investment Spending

Change in Interest Rate

Change in Business Expectations

Change in Business Taxes

Change in Government Spending

Change in Federal, State, and Local Government Spending

Change in Exports and Imports

Change in Foreign Incomes

Change in Exchange Rates

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

Aggregate Supply

Aggregate supply is the relationship between the total quantity of goods and services an economy produces at various price levels, holding all other determinants of production unchanged

The aggregate supply (AS) curve slopes upward to the right

As price level rises, quantity of goods and services the economy produces increases

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

Figure 17.3 The Aggregate Supply Curve

Price Level (P)

Real GDP (Y)

Aggregate Supply (AS)

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

The aggregate supply represents the entire economy’s total production in the short-run

Higher price levels bring higher levels of total production in the economy

We assume that in the short-run, labor force, capital stock, stock of natural resources, and level of technology are held constant

If the price level increases, everything else constant, the aggregate quantity supplied increases

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

Changes in Aggregate Supply

A change in the aggregate supply means that the per-unit production costs are rising (or falling) for some reason unrelated to an increase in production/output

An increase in aggregate supply will shift the curve to right

At any given price level, firms are willing and able to produce more goods and services

Or, Firms can produce the same level of output at lower unit costs

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

Figure 17.4 Changes in Aggregate Supply

Price Level (P)

Real GDP (Y)

AS”

AS’

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

There are two types of changes or shifts in aggregate supply

As the supply of factors of production (land, labor, capital, entrepreneurial ability) increase over time, the aggregate supply curve will shift right

Increases in the productivity of factors of production will reduce unit costs and shift the aggregate supply curve to right

These movements are synonymous with a country’s long-run economic growth

We are interested in the type of shifts that result in the short-run, less than one year

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

Input prices used in the production of goods may change

This causes an increase in the costs of production and decreases aggregate supply

Many countries have experienced exchange rate shocks where there is a large shift in the real value of a country’s currency in a short period of time

Imports may account for 20% or 30% of GDP, and many of these imports are intermediate products

This changes a firm’s costs of production changing aggregate supply

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

Changes in business taxes can also shift the AS curve

Increases in overall business taxes increases costs of production decreasing AS and vice versa

The AS curve can also be influenced by changes in the public’s inflationary expectations

Perceived increases in future inflation cause adjustments in economic action today

Producers may attempt to increase prices today to stay ahead of anticipated inflation

Workers may attempt to receive larger salary increases today to protect real wages and standards of living

The AS curve will shift to the left

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

Table 17.2 Determinants or Factors that Shift the Aggregate Supply Curve

Change in Factor Supplies

Change in Labor Force

Change in Capital

Change in Land

Change in Entrepreneurial Ability

Change in Productivity

Change in Input Prices

Change in Raw Material Prices

Change in the Price of Labor, etc.

Change in Exchange Rate

Change in Business Taxes

Change in Inflationary Expectations

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

Figure 17.5 Energy Production and Consumption Per Dollar of Real GDP

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Production

Consumption

Thousands of Btu/Real GDP in 1996 Dollars

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

Aggregate Equilibrium

The intersection of the AS and AD curves determine an open economy’s equilibrium

If any of the determinants of the demand and supply curves change, the equilibrium level of output and the price level will change

Changes in the exchange rate can affect an open economy’s equilibrium level of output and the price level

Changes in the exchange rate can affect a country’s trade flows

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AGGREGATE DEMAND AND AGGREGATE SUPPLY: A REVIEW

Figure 17.6 The Equilibrium Price Level and Equilibrium Real Output (GDP)

Price Level (P)

Real GDP (Y)

Aggregate Supply (AS)

Aggregate Demand (AD)

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Changes in aggregate demand and aggregate supply influence output

We will focus on one component of aggregate demand and supply – the current account

We want to examine how a change in the current account (exports minus imports) impacts the equilibrium level of output

Changes in other determinants of AD and AS will be ignored

DETERMINANTS OF THE CURRENT ACCOUNT

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Exports

In the short-run, a country’s exports are a function of two major determinants

The first is the level of income in foreign countries (Yf)

A country’s exports depend on foreigner's ability to pay for the goods and services

As foreign incomes change, the level of a country’s exports will also change

DETERMINANTS OF THE CURRENT ACCOUNT

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The size of this foreign-income effect depends on two factors:

The most obvious is the size of the change in foreign income

Larger income changes have larger effects on exports

Changes in foreign income that affect a country’s exports are weighted averages of changes in income among the countries trading partners

DETERMINANTS OF THE CURRENT ACCOUNT

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Income elasticity of demand for the country’s exports also affects the size of the foreign-income effect

An income elasticity of demand measures the percentage change in a country’s exports relative to the percentage change in foreign income

The income elasticity of demand for exports is

DETERMINANTS OF THE CURRENT ACCOUNT

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From the income elasticity of demand for exports

DETERMINANTS OF THE CURRENT ACCOUNT

Is a positive number indicating that as Yf increases (decreases), a country’s X increase (decrease)

=1 as in U.S.A.

>1 as in Germany and Japan

<1 as in Chile, Ecuador and South Africa

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From the income elasticity of demand for exports

DETERMINANTS OF THE CURRENT ACCOUNT

The size of country’s foreign income elasticity depends on the product mix of a country’s exports

A country exporting a high percentage of products that have a high income elasticity of demand will tend to have a higher foreign income elasticity, and vice versa

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The second determinant of a country’s exports is the real exchange rate (RXR)

As real value of country’s currency appreciates (depreciates), the level of a country’s exports declines (increases)

Size of the effect depends on the size of change in real exchange rate

The larger the change in the real exchange rate, the larger the effect on exports

DETERMINANTS OF THE CURRENT ACCOUNT

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The second factor is the sensitivity/responsiveness of exports to changes in the real exchange rate, the price elasticity of demand for exports

The price elasticity of demand for exports is

DETERMINANTS OF THE CURRENT ACCOUNT

The sensitivity of a country’s exports is inversely related to changes in the real exchange rate

A price elasticity of -1 indicates that a 1% appreciation in the RXR causes a 1% decline in a country’s exports

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In sum, changes in foreign income, the income elasticity of demand for exports, changes in the real exchange rate, and the price elasticity of demand for exports determine a country’s export sensitivity

This export sensitivity in turn determines the sensitivity of a country’s AD to changes in each of these determinants

DETERMINANTS OF THE CURRENT ACCOUNT

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Imports

The first determinant is the level of domestic income (Yd)

As domestic income rises, the level of imports rises

Size of effect depends on two factors, the size of change in domestic income and the income elasticity of demand for imports

The income elasticity of the demand for imports is

DETERMINANTS OF THE CURRENT ACCOUNT

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The second determinant is the real exchange rate

As currency appreciates (depreciates), imports become cheaper (expensive) and tend to increase (decrease)

Magnitude of effect depends on two factors, the size of change in the real exchange rate and the price elasticity of demand for imports

The price elasticity of the demand for imports is

DETERMINANTS OF THE CURRENT ACCOUNT

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In sum, changes in domestic income, the income elasticity of demand for imports, changes in the real exchange rate, and the price elasticity of demand for imports determine changes in domestic income in the short run

Import sensitivity in turn determines the sensitivity of a country’s AD to changes in each of these determinants

DETERMINANTS OF THE CURRENT ACCOUNT

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DETERMINANTS OF THE CURRENT ACCOUNT

Table 17.4 Factors Determining the Current Account

Factor	Effect on
Foreign Income Increases	Exports Increase	Current Account Increases
Foreign Income Decreases	Exports Decrease	Current Account Decreases
Real Exchange Rate Increases	Exports Increase	Current Account Increases
	Imports Decrease
Real Exchange Rate Decreases	Exports Decrease	Current Account Decreases
	Imports Increase
Domestic Income Increases	Imports Increase	Current Account Decreases
Domestic Income Decreases	Imports Decrease	Current Account Increases

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Marshal-Lerner (ML) Condition

Is a traditional approach in assessing the long-run effects of currency devaluation or depreciation

If the sum of import and export demand elasticities add up to at least one, then currency depreciation will improve the country’s trade balance in the long-run

DETERMINANTS OF THE CURRENT ACCOUNT

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You can also watch the following video on the ML condition online:

http://www.econclassroom.com/?p=2818

DETERMINANTS OF THE CURRENT ACCOUNT

Table 17.3 Multilateral Trade Elasticities: Estimated Price and Income Elasticities

	Income Elasticity	Price Elasticity		Income Elasticity	Price Elasticity
Imports			Exports
Canada	1.84	1.02	Canada	1.69	0.83
Germany	1.88	0.60	Germany	1.86	0.66
Japan	0.35	0.93	Japan	2.00	0.93
U.K.	2.51	0.47	U.K.	2.07	0.44
U.S.	1.94	0.92	U.S.	1.54	0.99
Rest of OECD	2.03	0.49	Rest of OECD	1.75	0.83
LDCs	0.40	0.81	LDCs	2.26	0.63

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Source: J. Marquez. 1990. “Bilateral Trade Elasticities” Review of Economics and Statistics 72 (1): pp. 70-77

In the short-run, the aggregate demand curve is the link between the current account balance and output of the entire economy

Because real exchange rate changes impact the current account, we can link real exchange rate changes to changes in domestic economy’s output

EXCHANGE-RATE CHANGES AND EQUILIBRIUM OUTPUT IN AN OPEN ECONOMY

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Exchange Rate Appreciation

Equilibrium exchange rate equates inflows and outflows of foreign exchange at XRe

Assume this rate is associated with purchasing power parity

The equilibrium exchange rate determines the country’s imports, exports, and initial level of aggregate demand

Assuming no capital flows between countries, foreign trade is balanced and the economy is at equilibrium

EXCHANGE-RATE CHANGES AND EQUILIBRIUM OUTPUT IN AN OPEN ECONOMY

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EXCHANGE-RATE CHANGES AND EQUILIBRIUM OUTPUT IN AN OPEN ECONOMY

Figure 17.7a The Exchange Rate and Equilibrium Output

Exchange Rate (XR)

XRe

Foreign Exchange (FX)

FXe

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EXCHANGE-RATE CHANGES AND EQUILIBRIUM OUTPUT IN AN OPEN ECONOMY

Figure 17.7b The Exchange Rate and Equilibrium Output

Price Level (P)

Real GDP (Y)

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Suppose that the currency appreciates to XR’

This could be caused by a rightward shift of the supply curve or a leftward shift in the demand curve for foreign exchange

Assume that the supply of foreign exchange increased from S to S’

The equilibrium in the foreign exchange market changes (from E to M) and the real exchange rate appreciates (from XRe to XR’)

Exports would fall and imports would rise resulting in a current account deficit (amount X to M)

EXCHANGE-RATE CHANGES AND EQUILIBRIUM OUTPUT IN AN OPEN ECONOMY

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EXCHANGE-RATE CHANGES AND EQUILIBRIUM OUTPUT IN AN OPEN ECONOMY

Figure 17.7a The Exchange Rate and Equilibrium Output

Exchange Rate (XR)

XRe

XR’

Foreign Exchange (FX)

FXe

FX’

S’

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EXCHANGE-RATE CHANGES AND EQUILIBRIUM OUTPUT IN AN OPEN ECONOMY

Figure 17.7b The Exchange Rate and Equilibrium Output

Price Level (P)

P’

Real GDP (Y)

Y’

AD’

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As the current account moves into deficit, the aggregate demand will decline as exports decline and imports increase

The aggregate demand curve would shift to the left (from AD to AD’) creating a new equilibrium at point G, with output Y’ and price level P’

The real appreciation of the currency causes a decrease in the equilibrium level of total output (real GDP)

EXCHANGE-RATE CHANGES AND EQUILIBRIUM OUTPUT IN AN OPEN ECONOMY

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Price level also falls as aggregate demand decreases

With an appreciating currency, the price of imports declines

Price of domestic goods that compete with imports may fall as a result

The net result is that the domestic price level falls (from P to P’)

EXCHANGE-RATE CHANGES AND EQUILIBRIUM OUTPUT IN AN OPEN ECONOMY

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EXCHANGE-RATE CHANGES AND EQUILIBRIUM OUTPUT IN AN OPEN ECONOMY

Figure 17.8 Nominal and Real Exchange Rates in the U.S.

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Nominal XR

Real XR

Nominal XR

Real XR

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EXCHANGE-RATE CHANGES AND EQUILIBRIUM OUTPUT IN AN OPEN ECONOMY

Figure 17.9 CPI Inflation in the U.S.

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Exchange Rate Depreciation

Suppose that the currency depreciates to XR’

This could be caused by a rightward shift of the demand curve or a leftward shift in the supply curve for foreign exchange

Suppose that demand for foreign exchange increases

As the exchange rate depreciates from XRe to XR’, a current account surplus would occur (amount M to X at the new equilibrium rate XR’)

Exports increase and imports decrease as the price of domestic goods falls

EXCHANGE-RATE CHANGES AND EQUILIBRIUM OUTPUT IN AN OPEN ECONOMY

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As the current account moves into surplus, aggregate demand increases (from AD to AD’) as exports increase and imports decrease

As equilibrium changes from point F to G, the domestic real GDP increases as total output increases from Ye to Y’ and the aggregate price level rises from Pe to P’

The net result of a depreciating currency is a higher level of output and a higher price level

EXCHANGE-RATE CHANGES AND EQUILIBRIUM OUTPUT IN AN OPEN ECONOMY

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EXCHANGE-RATE CHANGES AND EQUILIBRIUM OUTPUT IN AN OPEN ECONOMY

Figure 17.10a The Effect of a Depreciation of the Currency

Exchange Rate (XR)

XRe

XR’

Foreign Exchange (FX)

FXe

FX’

D’

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EXCHANGE-RATE CHANGES AND EQUILIBRIUM OUTPUT IN AN OPEN ECONOMY

Price Level (P)

P’

Real GDP (Y)

Y’

AD’

Figure 17.10b The Effect of a Depreciation of the Currency

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Exchange Rate Shocks

Suppose a currency experiences a 75% depreciation in one week

Demand for foreign exchange would dramatically increase (from D to D’’) and the supply would dramatically decrease (from S to S’’)

The equilibrium changes (from point E to F) and the exchange rate would change (from XRe to XR’)

This could be the result of capital flight out of the country due to a domestic crisis or due to exchange rate being fixed at an inappropriate level for a long period of time

EXCHANGE-RATE CHANGES AND EQUILIBRIUM OUTPUT IN AN OPEN ECONOMY

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The effects on a domestic economy can be calamitous in the short-run

Large changes in the exchange rate in the short-run can have a substantial effect on the aggregate supply curve

If depreciation is large, the effects can be substantial

Depreciation causes a large short-run increase in the cost of production

EXCHANGE-RATE CHANGES AND EQUILIBRIUM OUTPUT IN AN OPEN ECONOMY

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EXCHANGE-RATE CHANGES AND EQUILIBRIUM OUTPUT IN AN OPEN ECONOMY

Figure 17.11a The Effect of a Major Devaluation

Exchange Rate (XR)

XRe

XR”

Foreign Exchange (FX)

FXe

D”

S”

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EXCHANGE-RATE CHANGES AND EQUILIBRIUM OUTPUT IN AN OPEN ECONOMY

Figure 17.11b The Effect of a Major Devaluation

Price Level (P)

P”

Real GDP (Y)

Y”

AS”

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The aggregate supply curve would shift to the left (from AS to AS’)

This reduction in output may be enough to cause a major recession

The economy is now faced with lower output (from Ye to Y’) and higher prices (from Pe to P’)

While uncommon in developed countries, they are common in developing countries and avoiding these is a major task for policymakers in these countries

EXCHANGE-RATE CHANGES AND EQUILIBRIUM OUTPUT IN AN OPEN ECONOMY

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EXCHANGE-RATE CHANGES AND EQUILIBRIUM OUTPUT IN AN OPEN ECONOMY

Figure 17.12 Peso/Dollar

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Mexico experienced extreme depreciation of its currency in the early 1980s and mid 1990s

EXCHANGE-RATE CHANGES AND EQUILIBRIUM OUTPUT IN AN OPEN ECONOMY

Figure 17.13 Mexico’s Real GDP (1995 = 100)

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The extreme depreciations were reflected in the economy’s real GDP

The real exchange is important because it affects the level of international trade and the rate of growth of GDP in the short-run

The general framework employed to analyze the effects of real exchange rate changes on domestic output and the price level is called the aggregate demand and aggregate supply model

Aggregate demand is the relationship between total quantity of goods and services that all sectors of society demand and the price level

SUMMARY

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The negative slope of the aggregate demand curve indicates that as the price level rises, the values of people’s real wealth decreases and spending declines, interest rates increase and spending declines, the price of domestically produced goods rises with respect to foreign goods and exports decline and imports increase

When one of the determinants of aggregate demand that has been held constant changes, the aggregate demand curve will shift

SUMMARY

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Aggregate supply is the relationship between total quantity of goods and services an economy produces at various price levels, holding all other determinants of production constant

The aggregate supply curve will shift if one of the determinants of aggregate supply that has been held constant changes

The intersection of the aggregate demand and aggregate supply curves determines an open economy’s equilibrium level of output and the price level

SUMMARY

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Changes in the current account influence the equilibrium level of output

The link between the current account balance and the entire economy’s output in the short run is through a country’s aggregate demand

Dramatic changes in the real exchange rate can affect the domestic economy through changes in the aggregate supply curve

SUMMARY

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