6.4.5—Exchange rates in AD/AS

A depreciation may increase net exports and shift aggregate demand right; an appreciation may reduce net exports and shift AD left. The effect is conditional, not automatic.

Pass-through to prices, import content of exports, elasticities, spare capacity and retaliation affect the result. A depreciation can raise SRAS costs through imported inputs, so output and prices may move in opposing directions.

If export demand is elastic and imported inputs are a small share of production, depreciation can raise net exports and output. If imports are essential and inelastic, the cost shock may dominate initially.

An exchange-rate movement is not itself an AD curve shift unless you identify the spending or net-export channel it changes.