Appreciation: Refers to the rise in the value of a currency in a floating exchange rate

system.

Relative inflation rates decrease thus the currency appreciates (China’s inflation rate in
1980s dropped by 6 percent, the decreased inflation rates changed can increase
Chinese international competitiveness as Chinese exports become more competitive,
thus increase the demand for Chinese exports, thus have more exports sold and
consumers have to buy in RMB, therefore increase the demand for Chinese Yuan.)

Relative interest rates increase thus the currency appreciates (US raise interest rate in
2022, thus the foreigners will think that US is the best place to put their money, which is
a great way to return the savings. Thus they swap their currency from pound into USD,
that increases the demand for USD, therefore shifting demand curve to the right.

US exports are more expensive to foreigners → quantity of exports demanded

decreases. US imports are less expensive → quantity of imports demanded increases.
Therefore, Appreciation causes net exports (X-M) to decrease.

Consequences for inflation:

Appreciation causes net exports (X-M) to decrease → aggregate demand decreases →
demand-pull inflationary pressures will decrease.

Appreciation makes US imports less expensive → imported inputs become cheaper so

firms’ costs of production decreases → SRAS increases → cost-push inflationary
pressures decrease.

Consequences on employment:
Appreciation causes net exports (X-M) to decrease → aggregate demand decreases →
cyclical unemployment increases.

Employment in export industries is likely to decrease as the quantity of exports

demanded is likely to fall. Moreover, employment in industries producing goods that
compete with imports is also likely to decrease as the quantity of imports demanded is
expected to increase with appreciation.

Consequences on economic growth:

Appreciation causes net exports (X-M) to decrease → aggregate demand decreases →
negative effect on output and economic growth.

Appreciation makes US imports less expensive → costs of production decrease →

SRAS increases → positive effect on output and economic growth.

Net effect on growth depends on which of the effects is stronger.

Consequences on living standard:

Appreciation makes US imports less expensive → consumers can afford a higher
quantity of imports for a given amount of money → consumers' living standards
increase.

Travelers abroad will also benefit as the cost of traveling outside of the country will
decrease.

Consequences for stakeholders:

Consumers benefit from lower import prices and lower inflation
Firms that depend on imported inputs benefit because the costs of production decrease
Firms/workers in export industries and import-competing industries suffer
Foreign countries exporting to Merryland sell a higher quantity of exports

Government intervention: Government intervention is any action carried out by the

government that affects the market with the objective of changing the free market
equilibrium.
Market: a place where buyers and sellers meet and agree on the price of goods or
services.

Equity: Equity is the idea of being fair.

Public goods: A public good is defined as a good which is non-excludable and non-
rivalrous.

Market failure: Market failure occurs when the price mechanism fails to achieve
allocative efficiency, resulting in an overallocation or an underallocation of resources
relative to the social optimum.

Stakeholders: A stakeholder is any person or organization that has an interest in a firm,

project, or policy.

Price ceiling: This is a situation where the government sets a maximum price, below the
equilibrium price to prevent producers from raising the price above it.

Price floor (minimum price): the lowest possible price set by the government that
producers are allowed to charge consumers for the goods and services produced.