The Impact of Falling Dollar in Long Run and Long Run

If the dollar fell, which it could do next year. This would be the economic impact.

• In the short term, a depreciation in the dollar makes exports cheaper and imports more expensive therefore there is a boost to aggregate demand (X-M) Therefore, this boost in exports is likely to improve economic growth.
• However, a depreciation doesn't guarantee long term economic growth. A depreciation does nothing to increase productive capacity. It is a reflection that the economy is becoming less competitive.
• Also a depreciation can cause inflation. This is for 3 reasons.

1. Firstly aggregate demand will increase (potential for excess demand in economy)
2. Secondly, the price of imported goods will be higher. (imported inflation)
3. Thirdly, firms may have less incentive to cut costs.

• Therefore, it is argued a long term depreciation causes the economy to become less competitive.
• A depreciation should help the trade balance. Exports increase faster than imports. However, the impact of a depreciation depends upon
• the elasticity of demand. If demand for exports is inelastic then a cheaper.
• It becomes more difficult to attract foreign capital flows. For example, the US have been financing their National debt by attracting foreigners to buy. But, with dollar depreciating this makes a bad investment. Therefore, it is more difficult to finance national debt. This will lead to either higher interest rates or inflation.