When the US exchange rate increases foreign goods become cheap to buyers in

When the us exchange rate increases foreign goods

  • No School
  • AA 1
  • 7

This preview shows page 4 - 7 out of 7 pages.

When the US exchange rate increases, foreign goods become cheap to buyers in America. When the exchange rate appreciates, there will be a decrease in the aggregate demand, this means that the AD curve shifts inward. Due to this appreciation the imports become cheaper while the exports becomes more expensive, this means that the volume increases on the imports while volume diminishes on the export. Therefore, the net exports will fall and that will reduce the aggregate demand. Currency depreciation has a vice versa effect where aggregate demand increases.
Image of page 4

Subscribe to view the full document.

What is the difference between a recessionary gap and an inflation gap? Please briefly explain Recessionary gap is the distance between the level of potential GDP and an output level, i.e. between Yp and Y1 in the above diagram. This gap is as a result of rise of savings, rise in taxes, rise in imports and fall in exports, fall of government spending. Having an economy that has a recessionary gap, may lead to long-time unemployment.
Image of page 5
Inflationary gap is the gap between potential GDP and real GDP at equilibrium, i.e. the difference between Y1 and Yp in the above diagram. Sometimes the gap needs to be interpreted. The gap shows that the since there is no enough goods and services produced in the economy, how much people spend will cause the gap in the price level. What happens if the economy is at its long-run equilibrium and aggregate demand increases? Please explain how the economy will adjust to a new equilibrium Long-run equilibrium economic growth increases with time due to productivity and is represented in the aggregate demand and aggregate supply diagram with a gradual shift to the right. The level of employment happens when there is an adjustment of real wage so that the quantity of labor supplied is equal to labor demanded. There is an achievement of potential level of output due to the natural level of employment. When long-run equilibrium and aggregate demand increase, there will be a decrease in the economic levels.
Image of page 6

Subscribe to view the full document.

The above diagram portrays the economy in long-run equilibrium. If there is an increase to AD2, there will be a reestablished of a real GDP. This intersection of the long-run aggregate supply curve and long-run aggregate supply curve determines the price level and real GDP equilibrium.
Image of page 7

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes