Macroeconomics
Notable Changesintradepoliciesaffectthedemandforandsupplyofacurrency,whichinfluencesequilibriumin the foreign exchange market. When trade restrictions are increased, such as increased tariffs on American imports and/or reduced import quotas from the U.S., the demand for goods and services producedintheU.S.decreases,causingadecreaseinthedemandfortheU.S.dollar,andviceversa.As aresult,theexchangeratefortheU.S.dollarmaydecrease(depreciate),andtheequilibriumquantityof
U.S. dollars in the foreign exchange market may also be affected. H. Exchange Rate Efects on the Economy
Whenevertheexchangeratechanges,netexports(exports−imports)changetoobecausethevalueof imports and exports isaffected.Achangeinnetexportshasimplicationsonthebalanceofpayments, aggregate demand, and the level of output. Exchange Rate and the Balance of Payments When a currency appreciates, imports increase as foreign currencies—and, consequently, goods and services—become cheaper. Since bothimportsandexportsarerecordedonthecurrentaccountofthe balance of payments, an increase in imports beyond the value ofexportsresultsinacurrentaccount defcit.Thissignifesthatthecountryispayingmoretoforeigncountriesthanitisreceivingfromthem. Conversely,whenacurrencydepreciates,itleadstoacurrentaccountsurplus,asdomesticgoodsand services become cheaper for foreigners. Exchange Rate, Aggregate Demand, and the Level of Output Netexports(X−M)constituteacomponentofaggregatedemandinanopeneconomy(C+I+G+[X− M]). Thus, a currency appreciation or depreciation affecting net exports will cause a change in the aggregate demand level. A currency depreciation contributing to a trade surplus (exports > imports) stimulates the economy, involving an increase in aggregate demand. Higher aggregate demand, in turn, boosts output and employment levels. Conversely, a currency appreciation contributing to a trade defcit (imports > exports)reducesnetexportsand,consequently,aggregatedemand.Thisdecreaseinaggregatedemand results in a lower output level and increased unemployment. I. Exchange Rate Policies Monetary Policy
Central banks implement monetary policiestoimpacteconomicoutcomesby influencing moneysupplyandinterestrates.Theresultingchangeintheprice level and net exports impacts the exchange rate.
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