Exchange Rate Impact on Net Exports

Steps:

• Recall aggregate demand (AD) formula: AD = C + I + G + (X - M), where net exports (X - M) affect total spending.
• Identify factors shifting AD: changes in consumption, investment, government spending, or net exports.
• Evaluate each option's effect on AD components.
• Select the option that decreases a component, leading to lower AD.

Why A is correct:

• Appreciation makes exports more expensive and imports cheaper, reducing net exports (X - M) per the AD formula, thus decreasing AD.

Why the others are wrong:

• B: Higher consumer confidence boosts consumption (C), increasing AD.
• C: More government expenditure (G) directly raises AD.
• D: Increased money supply lowers interest rates, stimulating investment (I) and consumption (C), raising AD.

Final answer: A