Explain how a currency depreciation can impact output in the short run and in the long...

Explain how a currency depreciation can impact output in the short run and in the long run.

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Expert Solution

For a firm which exports goods in the foreign market, demand of goods will increase due to reduction of price in the foreign market. Firm's price of goods is same in the domestic market but as currency of domestic market depreciates, the price will be lower in the foreign marker and demand will increase in the foreign market in short run. However, in the long run demand may decrease if other competitor arise in the foreign market. In normal situation demand will increase both in long run and short.

However, for an importer of goods demand of foreign good will be lower as he has to pay higher domestic currency to buy the same product from foreign. And he has to charge higher price in domestic market and thereby demand in domestic market the demand of his product will decrease.

Hence, for currency depreciation will increase output for exporting firm and decrease output for importing firm.

jeff jeffy answered 4 months ago

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