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Since November 2010, the US dollar has risen in value by 33% when compared to the...

Since November 2010, the US dollar has risen in value by 33% when compared to the major currencies in the world. Using the real goods model (the 45° diagram), and the aggregate demand - aggregate supply model, diagram and explain the effects on the equilibrium levels of price and aggregate output, Y, of this increase in the value of the dollar, holding everything else constant.

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Increase in the value of the currency as compared to the trading partners leads to appreciation of the currency. This appreciation in the value of currency reduces net exports because of fall in the value of exports and increase in the value of imports. Thus Aggregate demand curve will shift leftwards and Aggregate expenditure curve will also shift leftwards leading to decline in price level and national output in the economy.

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