Example: Flex Asymmetric Shock
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Let’s say Michigan has its own currency and trades SUVs with the rest of the United States. Suppose Americans no longer want gas guzzling SUVs. As Americans stop buying SUVs, aggregate demand falls in Michigan. Assume the manufactures in the rest of the United States do not experience the same demand shift. As the demand for Michigan cars falls, so does the demand for Michigan currency, causing it to depreciate. As the currency depreciates, Michigan cars become cheaper, enticing consumers to buy them again and blunting the effect of the initial shock.