[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

rises and its appreciation reduces net exports. Second, international developments—
booms or recessions abroad or changes in foreign interest rates—can have a direct
impact on the U.S. economy by shifting the ADI curve.
Wrap-Up
INTERNATIONAL FACTORS THAT AFFECT THE
SLOPE OF THE ADI CURVE
When monetary policy increases interest rates in response to a rise in inflation, the
dollar appreciates. An appreciation reduces net exports, one of the components
of aggregate spending. A rise in inflation leads to a fall in investment and net exports.
When monetary policy decreases interest rates in response to a fall in inflation, the
dollar depreciates. A depreciation increases net exports, one of the components of
aggregate spending. A fall in inflation leads to an increase in investment and net exports.
INTERNATIONAL FACTORS THAT SHIFT THE
ADI CURVE
Factors that increase aggregate expenditures at each rate of inflation (and shift the
ADI curve to the right) include
economic booms abroad
a rise in interest rates abroad.
Factors that decrease aggregate expenditures at each rate of inflation (and shift the
ADI curve to the left) include
economic recessions abroad
a fall in interest rates abroad.
The Exchange Rate and Inflation
Because net exports are one of the components of aggregate spending, fluctuations
in net exports can affect the equilibrium level of output. Fluctuations in output
around potential output in turn will affect inflation. The impact of output on inflation
was summarized in Chapters 29 and 31. But changes in the exchange rate can
also influence inflation more directly.
IMPORTED INPUTS
The prices in dollars that American firms must pay for imported goods depend both
on the prices charged by the foreign producers of these goods and on the value of
the dollar. If the dollar falls in value (depreciates), foreign goods cost more, just as
THE EXCHANGE RATE AND INFLATION ∂ 783