MACROECONOMICS
MACROECONOMICS
14th Edition
ISBN: 9781337794985
Author: Baumol
Publisher: CENGAGE L
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Chapter 20, Problem 1TY
To determine

To Analyze: The effects of currency appreciation by using an aggregate supply-demand diagram.

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Explanation of Solution

The relationship between supply of quantity and cost of goods or services, when represented graphically, it is called a supply curve. The point at which the supplied quantity equals the demanded quantity, then that is called an equilibrium price and equilibrium quantity.

Below shown is the diagram that represents the appreciation of currency in an economy.

  MACROECONOMICS, Chapter 20, Problem 1TY

In the above mentioned graph the real GDP is being represented by the xaxis and the price level is being represented by the yaxis . The demand curve D is sloping downwards and the supply curve S is sloping upwards. The equilibrium point is being represented by the intersection of the demand curve and the supply curve. With the appreciation of currency, there will be a decrease in net exports and hence a leftward shift in the aggregate demand curve. While at the same time, imports will cost cheaper because of which the aggregate supply curve shifts downwards from S to S1. Thus there will be a fall in the price equilibrium level from e to e1 whereby the output level and price level reduces.

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