Quiz 20: Exchange Rates and the Macroeconomy
Impact of prosperity in Japan on U.S. economy At the time of boom or prosperity in Japan, the citizens of the country will have more income and the country will have a higher GDP. This extra income is spent on the consumption of goods and services. Some of their consumption contains the exports from America. Hence, it can be concluded that, when the economy of Japan grows faster, the U.S. economy would also grow faster. Diagram for the impact on the U.S. economy when Japan grows faster The following diagram shows the impact on the U.S. economy when Japan grows at a faster rate. In the above diagram, X axis represents real GDP and Y axis represents price level. D and represent the initial demand and initial supply curve, respectively. When there is a boom in the Japan economy, the exports from United States increases; this leads to an increase in the aggregate demand of United States. The increase in USA's aggregate demand shifts the demand curve rightward from D to . The new demand curve and initial supply curve intersect each other at point . At the new equilibrium level, real GDP of U.S. increases from to .
Diagram for the impact of appreciation of currency The following diagram shows the effects of appreciation of currency in an economy. In the above diagram, X axis represents real GDP and Y axis represents the price level. The downward sloping curve (D) is a demand curve and upward sloping curve (S) is a supply curve. The intersection of demand curve and supply curve represents the equilibrium point. When the currency appreciates, net exports decrease and aggregate demand curve shifts leftward. At the same time, imports become cheaper, which leads to a downward shift in the aggregate supply curve. Hence, the price equilibrium level falls from e to e₁., thereby, reducing the price level and level of output.
Trade balance of Spain and Germany Lower rate of inflation in Germany compared to Spain means that prices of goods in Germany are comparatively lower than the prices of the commodities in Spain. When the price of a commodity is low, the money value is high; higher money value increases the level of exports in Germany. When exports are higher than imports, the country faces trade balance surplus. On the other hand, higher inflation rate in Spain shows that the price level of goods in Spain is higher. Higher price level reduces the money value. This decreases the level of exports and increases the level of imports. When imports are higher than exports, the country faces trade balance deficit. Hence, it can be concluded that Germany faces trade balance surplus and Spain faces trade balance deficit.