Effect of Exchange Rate on Aggregate Demand Shocks

Effect of Exchange Rate on Aggregate Demand Shocks 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: [1] 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] Secondly, decreases in P cause an increase in the real interest rate. Interest rates, the price a borrower pays to borrow, or the return a lender receives for lending, can be expressed as a nominal or real rate. The nominal rate is the amount that must be paid for borrowing, expressed solely in money terms. The real interest rate is the nominal rate adjusted to take account of inflation (p). Thus real interest rates are expressed by the following formula: Thus, the higher p, the lower the real interest rate. Therefore, any increase in inflation will generally lead to pressure on the nominal interest rate to increase, to offset the deduction that will result from inflation. However, as we have seen above, price level decreases add to the real value of money, this is the same as saying that they decrease inflation. A decrease in inflation will mean that real interest rates are now higher than they were before the decrease in inflation. Therefore, price level decreases raise real interest rates and cause pressure for interest rates to be reduced.[4] Thirdly, lower prices increase the international competitiveness of the economy, and this should be reflected in increased international demand for the economy’s exports, causing a rise in net exports and thus in the aggregate demand. Now we will look at aggregate demand shocks. A demand shock is an event that is sudden and unexpected, and has the effect of measurably affecting the demand for goods and services in the economy, either positively or negatively, for a temporary period of time.[5] That is to say, the event shifts the AD curve, either to the right or to the left. A positive demand shock increases demand and shifts the curve to the right, resulting in higher prices. A negative demand shock decreases demand, shifts the curve to the left, and thus leads to a decrease in prices. Any number of events could constitute a demand shock, from an unexpected tax cut that increases consumer spending, to a dip in consumer confidence that decreases consumer spending. Likewise, an economic boom in for example China could result in higher exports to China, increasing demand. The danger of an aggregate demand shock is that they are a cause of uncertainty in the economy. Uncertainty makes it difficult for firms, government and consumers to budget properly and make the most effective investment and saving decisions. Both positive and negative demand shocks can be harmful, however, negative shocks are generally more feared. A negative demand shock, such as a drop in consumer spending, will lead to price decreases and the 2008 global financial crisis has been traced to such a demand shock in the US, which led to a fall in house prices, causing problems in the US subprime mortgage sector that then extended to the rest of the financial sector and wider economy. However, positive demand shocks, such as China’s increased demand for raw materials to fuel its economic growth have led to price increases in a number of important commodities that have also caused economic difficulties around the globe. Therefore, the consensus is that demand shocks of either ty pe are dangerous and any means of dampening them available to governments are desirable.[6] So could exchange rates be used to dampen a demand shock? A brief look at the relationship between monetary factors and the demand curve will demonstrate that exchange rates can be used to affect the demand curve. Therefore, in a positive demand shock, exchange rates could be used to decrease demand and in a negative demand shock, exchange rates could be used to increase demand. The relationship between two currencies may be nominal (e), or it may be real (RER). The real exchange rate takes into account variances in price levels in the two economies. P represents price in the domestic economy and P* the price in the foreign economy. [7] The exchange rate can be used to increase or decrease the price of goods in the economy relative to other economies. This will in turn impact on the international demand for a country’s products. This will impact on the net export figure (NX). A higher exchange rate will decrease international demand and thus will pressure a demand curve towards the left. This could be used to temper a positive demand shock that had increased demand for goods and pressured the curve towards the right. Likewise, a lower exchange rate will increase international demand, increasing exports and shifting the demand curve to the left. This could be used in the event of a negative demand shock to reduce the impact of the shock.[8] Basically, if any sector of demand changes rapidly, the government can seek to push exports in the opposite direction by making them more or less expensive. It is a simple idea and manipulating exports may be more desirable than manipulating other elements of demand, such as government spending, and may be easier to manipulate than, for example, consumer spending. Finally, the question must be asked, is the approach feasible? A central bank can quite easily impact on exchange rates by trading in its own currency. Buying will increase the exchange rate and selling will decrease the exchange rate. However, in order to move a currency value significantly, a central bank would be required to buy or sell a ‘significant’ amount of a currency. So what constitutes a ‘significant amount’ in the foreign exchange market? The global currency market is the largest and most liquid asset class in the world. The accepted size of this market in 2007 was generally put at about two trillion dollars a day. That would make it ten to fifteen times the size of the bond market and fifty times the size of the equities market. That means on a normal trading day, two trillion dollars passes hands. It would take an enormous amount of selling or buying by a central bank to make a dent in this market. A central bank that stepped in to buy or sell a couple of billion dollars worth of their currency would barely be noticed on the market, especially for the major currencies. And the question arises, how would a government fund such an intervention? It is also estimated that about 85 to 90 percent of the forex market is made up of speculators, meaning that attempts to manipulate exchange rates would be vulnerable to massive speculator bets which would have the power to undo any effect a government had on price movements.[9] Also, given the side effects of exchange rate changes, such as the relationship of the exchange rate to inflation, it is likely that the cost of moving the exchange rate, just to get the indirect benefit of altering net exports, would outweigh the benefit.[10] Therefore, it is concluded here that while exchange rates could be manipulated to insulate the economy from aggregate demand shocks, it amount of intervention required would be too large to justify the measure. Bibliography Dutt Ros, Aggregate demand shocks and economic growth, Struct.C.Ec.Dy 18 (2007) 75-99 Hargreaves-Heap, S.P., 1980. Choosing the wrong natural rate: accelerating inà ¯Ã‚ ¬Ã¢â‚¬Å¡ation or decelerating employment and growth? Economic Journal 90, 239–253 Krugman Obstfeld, (2005) International Economics: Theory and Policy, 6th ed., Pearson: London Krugman, (1987) The narrowing band, the Dutch disease and the competitiveness consequences of Mrs. Thatcher, Notes of Trade in the Presence of Dynamic Scale Economies, Journal of Development Economics (Oct) 1987 p. 321 Krugman, (1998) The Age of Diminishing Expectation, MIT Press: Cambridge MA. Li, X.M., 2000. The Great leap Forward, economic reforms, and the unit root hypothesis: testing for breaking trend functions in China’s GDP data. Journal of Comparative Economics 28 (4), 814–827 Perron, P., 1989. The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis. Econometrica 57, 1361–1401 Romer, D., 1996. Advanced Macroeconomics. McGraw Hill: New York. Romer, D., 2000. Keynesian macroeconomics without the LM curve. Journal of Economic Perspectives 14 (Spring (2)), 149–169 Tobin, (1975) Keynesian Models of Recession and Depression, Am. Ec. Rev. 65, 195-202 Footnotes [1] Krugman Obstfeld, (2005) International Economics: Theory and Policy, 6th ed., Pearson: London [2] Krugman, (1998) The Age of Diminishing Expectation, MIT Press: Cambridge MA. [3] Dutt Ros, Aggregate demand shocks and economic growth, Struct.C.Ec.Dy 18 (2007) 75-99 [4] Krugman, (1987) The narrowing band, the Dutch disease and the competitiveness consequences of Mrs. Thatcher, Notes of Trade in the Presence of Dynamic Scale Economies, Journal of Development Economics (Oct) 1987 p. 321 [5] Tobin, (1975) Keynesian Models of Recession and Depression, Am. Ec. Rev. 65, 195-202 [6] Perron, P., 1989. The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis. Econometrica 57, 1361–1401 [7] Romer, D., 1996. Advanced Macroeconomics. McGraw Hill: New York. [8] Romer, D., 2000. Keynesian macroeconomics without the LM curve. Journal of Economic Perspectives 14 (Spring (2)), 149–169 [9] Li, X.M., 2000. The Great leap Forward, economic reforms, and the unit root hypothesis: testing for breaking trend functions in China’s GDP data. Journal of Comparative Economics 28 (4), 814–827 [10] Hargreaves-Heap, S.P., 1980. Choosing the wrong natural rate: accelerating inà ¯Ã‚ ¬Ã¢â‚¬Å¡ation or decelerating employment and growth? Economic Journal 90, 239–253

Anthem vs. Hunger Games Essay

In today’s society, a lot of people tend to take for granted what they have. Every once and a while, something drastic will ensue them, and that’s when they finally grasp what’s been right in front of them the whole time. In many different societies, for example the societies in The Hunger Games, and Anthem, the individuals that are living there are forced to listen to the ruler, or rulers, do not have an opinion in some of the choices that are made for them, and are also forced to accept the rule of selflessness. Based on the themes of the Power of Knowledge, the Image of Self, and the Consequences of Free Will, the novella, Anthem, and the film, The Hunger Games express similarities and differences regarding the dangers of a Totalitarian government and its effect on its citizens in order to teach the reader to be blessed that they have a democracy and that the individuals of the United States have it really easy compared to other countries, and even societies i n books or movies. The Power of Knowledge is the result of having or not having knowledge. Being knowledgeable is not just one quality, but is many and a process of learning, experiencing, knowing and understanding. In the book Anthem Equality 7-2521states, â€Å"But we must never speak of the times before the Great Rebirth, else we are sentenced to three years in the Palace of Corrective Detention† (Rand 19). This quote from Anthem is an important example of the Power of Knowledge because what Equality is saying is that every person in his town has the knowledge of what happened before the Great Rebirth, they just choose not to bring it up because they are petrified of what their punishments will be. However, an example of the Power of Knowledge from The Hunger Games is when Katniss recognizes the weakness of Seneca Crane, which is not having a winner of this year’s game, and uses that to her best advantage to force Seneca to let both her and Peeta win. This is important because if Katniss had not realized that doing so was his weakness, she and Peeta would have both had to kill themselves because they  did not want to live without each other. In conclusion to these two different pieces of evidence, they are also able to be compared by noticing the facts that if both these characters did not take into account the opinions or beliefs of others, there would never be a way to be different, or a way out. Image of self is the way one views his or herself, the ability to know our own flaws, strengths, bad habits and limits. When life starts to get rigid, most people lose hope in themselves because they feel as if they are not sturdy enough to stand anymore. In a lot of books, or even movies, this is a major problem that most characters face. In this case, from Anthem, the teachers always pointed out the flaws in Equality 7-2521, â€Å"There is evil in your bones, Equality 7-2521, for your body has grown beyond the bodies of your brothers† (18). This quote would be essential to the topic of Image of Self, because Equality already knew that he had all these â€Å"different† qualities, and knew that he was diverse from his brothers, yet he tried to remain the same by ignoring them. However in The Hunger Games, Katniss only sees the flaws that are in her, and chooses to ignore the compliments that everyone is saying to her. When life puts individuals in the situation that Katniss and Peeta are in in the film, it is important to deposit all the negatives away and to only focus on the positives, no matter how hard they may be to see. This is a contrast between the novella and the film because in Anthem Equality knows that he is different, but just ignores the fact that he can do nothing about it, but in The Hunger Games, Katniss does not let anyone try to make her better because she believes she will never be right, or in a way better than the other characters. Although the quotes are contrasting, the similarity in them is the fact that Equality and Katniss both know they are different than the rest, yet overcome them in some sort of way. The last theme being focused on is Consequences of Free Will. Consequences of Free Will means a person innate ability to make decisions with his or herself. I n a dictatorship, or the governments in Anthem and The Hunger Games, individuals are owned by the group, and they also have no right to lead his or her own life. This is known as collectivism. In today’s society,  making decisions for someone’s own good is very hard because everyone is trying to impress others. For example, in Anthem Equality states â€Å"It is a sin to think words no others think and to put them down upon a paper no others are to see† (17). The importance of this quote to the Consequences of Free will is that Equality is not able to express his own way of living because it is illegal to express his own being. In The Hunger Games, something that readers would learn regarding the Consequences of Free Will would be the idea that the tributes did not really know who to trust, and when, because they did not know when that person would turn against them. Similarly, these two pieces of information would go to together by both dealing with the idea of being able to show a person’s own true colors. In addition to them being similar, they would differentiate by the thought of trust, and expression. In Anthem, we as readers are seeing the idea of expression, but in The Hunger Games, we are watching how others are putting their trust into some, and how they are also putting up walls to others. Although these two societies are supposed to be completely different from the one that exists today, in some ways they could be seen as having the same â€Å"controlling† effect on the citizens. In our government, citizens have numerous more rights than other countries can even think of having, yet all of us choose to all try to be the same. Why is that? Why do individuals all strive to have the same hair, or wear the same clothes? Everyone should embrace our right to be dissimilar, and show the world that each and every one of us are not afraid to be ourselves, because there is no punishment that will be rewarded to us in long run.

Is It Okay to Eat Mango Skin

You can bite into an apple to eat it, but you probably dont eat a mango the same way. The peel of a mango fruit is tough, fibrous, and bitter-tasting. Yet, what if you do eat the peel? Is it good for you? Will it hurt you? Risks Although mango skin contains many healthful compounds, you might wish to skip the peel if you are sensitized to urushiol, the active chemical in poison ivy, poison oak, and poison sumac. Some people get dermatitis from handling or eating mangoes. In more extreme cases, exposure can cause difficulty breathing. The peel contains more urushiol than the fruit, so its more likely to produce a reaction. Even if you have never had a reaction from touching poison ivy or eating mango skin, you need to be aware of the risk. You could have been exposed to urushiol-containing plants many times or all your life and suddenly become sensitive. The other potential health risk from eating mango peel comes from pesticides. Since most people, at least in the United States, tend to remove the skin of the fruit, the fruit is often sprayed. If you wish to eat the skin, your best bet is to eat organic mangoes. Otherwise, be sure to wash the fruit before eating it to minimize pesticide residue. Benefits Although mango peel causes problems for people sensitized to urushiol, the skin is rich in mangiferin, norathyriol, and resveratrol, powerful antioxidants that might confer protection against cancer and other diseases. Mangoes are high in fiber—especially if you eat the peel—as well as vitamin A and vitamin C. A 2008 study conducted by Oklahoma State University found eating mangoes might help control blood sugar and cholesterol and reduce body fat. The team found that eating mangoes reduces levels of the hormone leptin, a chemical that regulates energy consumption and storage and helps regulate appetite. Weight Control The potential weight loss benefits are due primarily to compounds found in the skin of the mango, not the fleshy fruit. Research conducted by the University of Queensland School of Pharmacy found that mango peel extract inhibited adipogenesis, or fat cell formation. Although there are many different types of mangoes, two varieties scored particularly well with respect to fat inhibition: Nam Doc Mai and Irwin. Peel extract from the Kensington Pride variety had the opposite effect, actually promoting adipogenesis. The researchers noticed that the effects were similar to those seen from resveratrol, a well-known antioxidant found in red wine and grapes. Sources Taing, Meng-Wong et al. Mango fruit peel and flesh extracts affect adipogenesis in 3T3-L1 cells. Food Function.NCSI Research Finds Health Benefits in Mangos. Oklahoma State University Department of Nutritional Sciences.

Essay on Robert Frosts The Road Not Taken - 893 Words

Robert Frost’s â€Å"The Road Not Taken,† can be understood in various ways. The mood, attitude, and mindset of the reader predispose their thoughts towards the poem’s true meaning. The title of the Frost’s poem suggests that it is about decisions and obstacles in life and how people should handle them. Frost is voicing his opinion, saying that whatever path or decision making we make or do, one day, will be the key factor in your future tomorrow and thereafter. Almost every human being experiences life’s bumpy road journey and Frost indicates in his poem that there are never just one single path to take; instead it is like a complex maze. nbsp;nbsp;nbsp;nbsp;nbsp;A traveler comes upon quot;two roads diversified in a yellow woodquot;†¦show more content†¦When contemplating what decision to make the traveler wants to â€Å"†¦Look down one path as far as I could,† (Frost 719) attempting to see the future of the chose path and reap its benefits. The traveler must choose a way that will determine the rest of his life and the obstacles that are included with it. nbsp;nbsp;nbsp;nbsp;nbsp;The traveler comes to a conclusion and chooses a path that gives him a better feeling about his future life journey. This certain path provided a more positive outlook because it is the one that quot;was grassy and wanted wearquot; (Frost 719). The traveler chooses the path that only a few personas would dare to do. Frost demonstrates the personality and the type of person the traveler is. The traveler is an independent person, who is daring, adventurous, and wants to explore the unknown. nbsp;nbsp;nbsp;nbsp;nbsp;The traveler finds out that he is not the only one going this way, and that others have worn almost the same path. Frost is saying that both paths were equally taken by other people. Afterwards the traveler observes that quot;†¦Morning equally lay in leaves no step had trodden blackquot; ( Frost 719). Frost is indicating that leaves had fallen and that when he says no step had trodden black, he is indicating that it has been a long time since someone took this path. Frost is indirectly giving aShow MoreRelatedThe Road Not Taken1084 Words   |  5 PagesWoods English 102 CHA 8 November 2010 The Road Not Taken The poem â€Å"The Road Not Taken† by Robert Frost describes the dilemma in decision making, generally in life each individual has countless decisions to make and those decisions lead to new challenges, dilemmas and opportunities. In Frost’s poem, the careful traveler observes the differences of each path, one is bent and covered in undergrowth (Frost 5) and the other is grassy and unworn (Frost 8). In the end he knows he can only choose oneRead MoreThe Road Not Taken By Robert Frost Essay1156 Words   |  5 PagesRobert Lee Frost was an American poet. His work was initially published in England before it was published in America. 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