Exchange Rate Depreciation Boosts Net Exports

Steps:

• Recall aggregate demand (AD) = C + I + G + (X - M); outward shift requires increase in these components.
• Identify factors affecting net exports (X - M): exchange rate changes influence trade competitiveness.
• Depreciation lowers domestic currency value, making exports cheaper and imports costlier abroad.
• This raises X and lowers M, increasing net exports and shifting AD rightward.

Why D is correct:

• Depreciation of the exchange rate increases net exports per the balance of trade formula, directly boosting AD as defined in the AD equation.

Why the others are wrong:

• A: Reduces export competitiveness, decreasing net exports and shifting AD left.
• B: Lowers price level, causing movement along AD curve, not a shift.
• C: Raises interest rates, reducing investment and consumption, shifting AD left.

Final answer: D