Currency Depreciation Shifts Aggregate Demand Rightward

Steps:

• Depreciation lowers the pound's value, making UK exports cheaper for foreign buyers.
• Export demand rises, increasing net exports (NX = exports - imports).
• Imports become more expensive, reducing import volumes and further boosting NX.
• Higher NX shifts AD right, raising equilibrium output and price level.

Why A is correct:

• A shows the new intersection of shifted-right AD and original AS, reflecting higher Y and P per the AD-AS model where NX is a component of AD (AD = C + I + G + NX).

Why the others are wrong:

• B: Indicates leftward AD shift, which would occur from appreciation, not depreciation.
• C: Suggests AS shift, but depreciation primarily affects AD via trade, not production costs.
• D: Implies no change or lower equilibrium, ignoring the expansionary effect on demand.

Final answer: A