Macro Foundations · advanced
What moves on the Aggregate Supply – Aggregate Demand diagram
DepreciationdepreciationThe wearing out of capital over time, or, for currencies, a fall in value against others. boosts NX (AD right) but raises imported input costs (SRASSRASShort-run aggregate supply: what firms produce at each price level while wages and input costs are still sticky. left), a two-curve shock with an ambiguous output effect.
Start at equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change..
The currency depreciates: exports become cheaper abroad, imports become dearer at home.
Net exports rise. AD shifts right.
But imported inputs (fuel, components) now cost more. SRASSRASShort-run aggregate supply: what firms produce at each price level while wages and input costs are still sticky. shifts left.
New equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change.: the price level unambiguously rises; the output effect depends on which shift dominates (typically the AD effect for a small import-input share).
Examiners ask this as: currency depreciation, exchange rate falls, weaker dollar, aud falls, devaluation.
Other scenarios on Aggregate Supply – Aggregate Demand