Automatic Stabilizers And The Foreign Exchange Market

Question

Automatic stabilizers, such as progressive income taxes and unemployment benefits, help moderate fluctuations in aggregate demand. In the context of the foreign exchange market depicted above, what is the most likely effect during a recession when automatic stabilizers are active?

Accepted Answer

They reduce the severity of the leftward shift in the demand curve for U.S. dollars, thereby moderating depreciation.

Answer

They cause a rightward shift in the demand curve for U.S. dollars, leading to excessive appreciation.

Answer

They have no impact on the foreign exchange market since automatic stabilizers only affect domestic fiscal balances.

Answer

They lead to a leftward shift in the supply curve for U.S. dollars, accelerating depreciation.