Explain how exchange rates affect the level of aggregate economic activity and the price level. Use appropriate AS/AD diagrams to illustrate your answer
A currency appreciation will shift AD inward and shift AS outward. Economists think that the AD effect is larger in magnitude than the AS effect. The net effect on the economy is lower inflation, lower real output, and higher unemployment. A currency depreciation will shift AD outward and shift AS inward. Assuming the AD effect is larger than the AS effect, the economy will experience higher inflation, higher real output, and lower unemployment.
You might also like to view...
Answer the following statements true (T) or false (F)
1. The demand for necessities and goods that require a small expenditure tends to be price inelastic. 2. If total revenue decreases when a price is decreased, the demand for the commodity is elastic. 3. If the coefficient of elasticity for a commodity is 1.5 and the price of that commodity is raised, total revenue will decrease. 4. The slope of a demand curve is a measure of elasticity. 5. The demand for a fur coat tends to be more price elastic than the demand for automobile tires.
Over a five-year span, the ABC Co reduced the amount of labor it hired. At the same time, the marginal productivity of labor increased. Which of the following COULD explain this observation?
A) the law of diminishing marginal returns B) labor saving technical change C) organizational innovation D) All of the above.
If the number of close substitutes of a good increases, _____
a. the elasticity of demand for the good decreases b. the elasticity of demand for the good increases c. the elasticity of demand for the good becomes zero d. the elasticity of demand for the good remains unaffected
The exercise of union power will tend to
A. Cause product prices to be lower in unionized industries. B. Cause profits to be higher in unionized industries. C. Increase the supply of labor available to nonunion industries. D. Reduce the supply of labor available to nonunion industries.