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Increases in the real exchange rate (real depreciation) shifts theGroup of answer choicesIS curve to the rightIS curve to the leftLM curve to the rightLM curve to the left

Question

Increases in the real exchange rate (real depreciation) shifts theGroup of answer choicesIS curve to the rightIS curve to the leftLM curve to the rightLM curve to the left

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Solution

An increase in the real exchange rate (real depreciation) shifts the IS curve to the right.

Here's why:

  1. When the real exchange rate increases, it means that the domestic currency has depreciated relative to foreign currencies.

  2. This depreciation makes domestic goods and services cheaper for foreign buyers, which increases exports.

  3. The increase in exports leads to an increase in aggregate demand.

  4. The IS curve represents all combinations of the interest rate and level of income where the goods market is

This problem has been solved

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