Examining the Implications for an Economy of a Rising Exchange Rate
Assignment Titles
1. Examine the implications for an economy of a rising exchange rate FT 23 8 11 p16 Exchange rate kills Australian steel exports FT 7 9 11 p4 Bold move seen as high risk (Swiss max exchange rate)) FT 9 9 11 p32 Hong Kong faces dilemma over its peg to the dollar Financial Update 11/12 see Brazil, Australia, Switzerland and Japan
Introduction
Whilst popular opinion centres on the assumption that rising exchange rate has mostly positive effects on the economy, the impacts are both diverse and extensive. In the short run, a major implication is the improvement in the terms of trade as exports become more expensive and imports become relatively cheaper. This rise in the terms of trade leads a larger amount of imports to be purchased with a given amount of exports; an increase in the purchasing power of domestic production As a result of relative price fluctuations, there is likely to be an increase in domestic spending on imports, and decreased demand for exports in foreign countries.
In order to explore rising exchange rate effects on economy we need to understand essential macroeconomics like Aggregate Supply (AS) and Aggregate Demand (AD).
Economics- S. Nordhaus- 16th ed. – 1998 – McGraw-hill- US - p388
The central concepts for understanding the determination of national output and the price level are aggregate supply (AS) and aggregate demand (AD). Aggregate demand consists of the total spending in an economy by household, businesses, governments and foreigners. It represent the total output that would be willingly bought at each price level, given the monetary and fiscal policies and other factors affecting demand. Aggregate supply describes how much output businesses willingly produce and sell giving prices, costs, and market conditions.
AS and AD curves have the same shapes as the familiar supply and demand curves analysed in microeconomics. The downwar4d slopping AD curve shows the amount that consumers,
1. Examine the implications for an economy of a rising exchange rate FT 23 8 11 p16 Exchange rate kills Australian steel exports FT 7 9 11 p4 Bold move seen as high risk (Swiss max exchange rate)) FT 9 9 11 p32 Hong Kong faces dilemma over its peg to the dollar Financial Update 11/12 see Brazil, Australia, Switzerland and Japan
Introduction
Whilst popular opinion centres on the assumption that rising exchange rate has mostly positive effects on the economy, the impacts are both diverse and extensive. In the short run, a major implication is the improvement in the terms of trade as exports become more expensive and imports become relatively cheaper. This rise in the terms of trade leads a larger amount of imports to be purchased with a given amount of exports; an increase in the purchasing power of domestic production As a result of relative price fluctuations, there is likely to be an increase in domestic spending on imports, and decreased demand for exports in foreign countries.
In order to explore rising exchange rate effects on economy we need to understand essential macroeconomics like Aggregate Supply (AS) and Aggregate Demand (AD).
Economics- S. Nordhaus- 16th ed. – 1998 – McGraw-hill- US - p388
The central concepts for understanding the determination of national output and the price level are aggregate supply (AS) and aggregate demand (AD). Aggregate demand consists of the total spending in an economy by household, businesses, governments and foreigners. It represent the total output that would be willingly bought at each price level, given the monetary and fiscal policies and other factors affecting demand. Aggregate supply describes how much output businesses willingly produce and sell giving prices, costs, and market conditions.
AS and AD curves have the same shapes as the familiar supply and demand curves analysed in microeconomics. The downwar4d slopping AD curve shows the amount that consumers,