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时间:2018-03-23 09:03来源 作者:英国论文网 点击联系客服: 客服:Damien
The exchange rate helps insulate the economy from aggregate demand shocks but it may need unsettlingly large changes to do so.
This paper will examine the extent to which the exchange rate of a currency can be used to insulate an economy from aggregate demand shocks. First, it will define aggregate demand. Second, it will look at the monetary implications of the aggregate demand curve. Thirdly it will look define aggregate demand shocks and their effect on the aggregate demand curve. Fourthly, it will examine the ways in which the exchange rate can be used to reduce the impact of an aggregate demand shock. Finally, the question of whether using the exchange rate as a means of reducing the impact of an aggregate demand shock will be examined to determine whether it is a feasible strategy and whether the amounts required would be unsettling or not.
Aggregate Demand (AD) refers to the total demand (d) in the economy (Y) for goods and services at a certain price level and at a certain time. AD in an economy is the sum of all consumption (C), investment (I), government spending (G) and net exports (NX), where NX is equal to total exports (X) minus total imports (M). This can be represented mathematically as:
Aggregate demand is represented by the AD curve, which will show the relationship between price levels and the quantity that producers are willing to provide at that price. The relationship between AD and price is normally negative, showing that the less people are willing to pay, the less firms will produce or, from the other point of view, the less firms charge, the more people will buy. Below is a simple AD ‘curve’:
In the chart above, the AD ‘curve’ is represented by a negatively sloped line. If prices (P) are lower, demand (Y) is greater.
This negative relationship between price and demand has a number of important monetary consequences. It is necessary to briefly examine these prior to examining the relationship between exchange rates and aggregate demand.[2]
Firstly, price levels (P) have a direct relationship to the real value of money. This is because as price levels (P) decrease, the purchasing power of consumers increases, meaning that the real value of the money they hold increases. Likewise, if P increases, consumers get less for the same money, or the real value of their money has decreased. Therefore, P and the real value of money are inversely related to each other.[3](责任编辑:cinq)

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