Shifts In AD n AS (Hard)

Question 1

EXCHANGE RATES

Answer 1

Price of ones currency relative to another currency.

Question 2

What is an appreciation of the NZ$?

Answer 2

An appreciation of the dollar is an increase of the exchange rate which means the value of the dollar has increased.

Question 3

What is a depreciation of the NZ $?

Answer 3

A depreciation is a decrease in the exchange rate which means the value of the nz dollar has decreased.

Question 4

What is the effect of an appreciation?i

Answer 4

An appreciation in the dollar will result in a decrease in exports (x) as the NZ dollar will be relatively more expensive for other countries.

There will also be an increase in Imports (M) because they are now more cheaper as the NZ dollar has decreased in value.

The AD decreases. X decreases so AD shifts to the left.

Question 5

What is the effects of an increase in imports?

Answer 5

If imports increase the AD will decrease.

X-M

Question 6

INTEREST RATES

Answer 6

The price of using money. The cost of borrowing. If you borrow money then you must pay interest. Eg. Investment and credit spending. (Buying houses, cars, mortgages and loans etc)

Question 7

If interest rates RISE then…

Answer 7

INVESTMENT will fall because the cost of borrowing has increased which means that invest,net projects are less profitable.

(I goes down, AD goes down)

CONSUMPTION decreases as the cost of borrowing is increased which means credit spending is more expensive.

(C goes down, Ad goes down)

Question 8

Increase in interest rates will also cause…

Answer 8

An increase in exchange rates.

Question 9

When interest rates rise, relative to exchange rates…

Answer 9

Investment is attracted towards the higher currency. Now because there is an increase in demand for the higher currency, it will increase the value of the dollar. (APPRECIATES)

Question 10

When the interest rate falls relative to the exchange rate…

Answer 10

Invest,net funds are moved away from it.

This is a decrease in demand for the higher interest rate. Decreases the value of the dollar (DEPRECIATION)

Question 11

Increase in interest rate causes exchange rates to increase which means…

Answer 11

Exports fall

(X goes down so AD goes down)- shift left

Imports rise

(M goes up so AD goes down) - shift left