Start networking and exchanging professional insights

Register now or log in to join your professional community.

Follow

How does direct foreign exchange rates affect the aggregate demand?

user-image
Question added by Danish Jamal , Jr Assistant Stores , SUPARCO
Date Posted: 2014/04/14
Deleted user
by Deleted user

Exchange rates are rates at wich we convert domestic currency/foreign currency with other foreign currrencies. This is to say that it is always done in pairs. When you buy a currency, you are simultaneously selling one. So, we will alway have a base currency (the one we are selling or buying) and a quote currency (the one we use to pay for the sale or purchase of that base currency). The relationship between the two currencies and  rates at which they are exchanged is affected by tons of factors--of which all will affect the rates by first affecting the economic strenghts/weaknesses of the specific country/currency. When discussing aggregate demand, it is natural to see it in terms of changes in imports and exports. A weakening of currency (exchange rate or price of foreign currency rising while inflation remains constant), possibly from reduce in interest rates (reduced foreign investments and demand for domestic currency) means that the products to be exported have become cheaper for foreigners becasue they can buy the same amount of goods and services with lesser amount of their domestic currency. Similarly, importing becomes expensive-- there is a drop in imports and demand for imported goods and services.This will cause an increase in net export and aggregate demand. Generally, a higher exchange rate shifts an aggregate demand curve to the right (increaes), and a lower exchange rate shifts an aggregate demand curve to the left (decreases).

More Questions Like This