Satoshii
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Hi i was watching a video on how to reduce unemployment

To reduce cyclical unemployment (demand deficiency) you'd have to use expansionary fiscal/monetary policy

How would a reduction in exchange rate reduce cyclical unemployment, i know it'll increase exports and therefore AD, but wouldn't it also increase domestic prices and possibly reduce demand? kinda confused

ty
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KingPap
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You're correct in saying that a reduction in exchange rates will increase exports and so AD. This will cause demand for workers to rise as firms are incentivised to produce more and so cyclical unemployment will reduce.

What you have said about domestic prices is true, however this depends on what part of the LRAS curve that the economy is on at the time. If the economy is operating on the elastic part of the LRAS then an increase in AD will not cause domestic prices to rise. If the economy is operating on the bottleneck stage then this will cause a shift onto the inelastic part of the demand curve which in turn will cause prices to rise.

Simply base your answer on the assumption that the economy is operating on the elastic part of the LRAS and if need be use your point about rising prices as an eval.

There are two different diagrams that can be used to learn about aggregate demand, if you haven't the same one i have this whole thing probably makes no sense lol

Hope it does though (Y)
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Satoshii
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(Original post by KingPap)
You're correct in saying that a reduction in exchange rates will increase exports and so AD. This will cause demand for workers to rise as firms are incentivised to produce more and so cyclical unemployment will reduce.

What you have said about domestic prices is true, however this depends on what part of the LRAS curve that the economy is on at the time. If the economy is operating on the elastic part of the LRAS then an increase in AD will not cause domestic prices to rise. If the economy is operating on the bottleneck stage then this will cause a shift onto the inelastic part of the demand curve which in turn will cause prices to rise.

Simply base your answer on the assumption that the economy is operating on the elastic part of the LRAS and if need be use your point about rising prices as an eval.

There are two different diagrams that can be used to learn about aggregate demand, if you haven't the same one i have this whole thing probably makes no sense lol

Hope it does though (Y)

It does now, thanks a lot - i really appreciate the thorough answer
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Satoshii
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(Original post by KingPap)
You're correct in saying that a reduction in exchange rates will increase exports and so AD. This will cause demand for workers to rise as firms are incentivised to produce more and so cyclical unemployment will reduce.

What you have said about domestic prices is true, however this depends on what part of the LRAS curve that the economy is on at the time. If the economy is operating on the elastic part of the LRAS then an increase in AD will not cause domestic prices to rise. If the economy is operating on the bottleneck stage then this will cause a shift onto the inelastic part of the demand curve which in turn will cause prices to rise.

Simply base your answer on the assumption that the economy is operating on the elastic part of the LRAS and if need be use your point about rising prices as an eval.

There are two different diagrams that can be used to learn about aggregate demand, if you haven't the same one i have this whole thing probably makes no sense lol

Hope it does though (Y)
Hey i have one more question if thats ok, why would trade imbalances lead to protectionist measures when there are growth shocks? I mean wouldn't that just reduce growth even more and contradict the initial objective - thanks
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KingPap
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(Original post by Satoshii)
Hey i have one more question if thats ok, why would trade imbalances lead to protectionist measures when there are growth shocks? I mean wouldn't that just reduce growth even more and contradict the initial objective - thanks
Protectionism is imposed in order to limit free trade. Although free trade has its advantages, it also has many disadvantages that make a country vulnerable to growth shocks like on supply. For example one disadvantage of free trade is interdependancy which typically means that a country relies too heavily on an import. To make things simple lets say that the UK is highly dependent on car imports from Germany. If there are growth shocks in Germany, meaning that their supply of cars is low, the UK will find it increasingly difficult to obtain to import. Consequently, the UK will impose protectionist measures such as tariffs in order to incentives UK firms to produce cars and so lower their reliance on German imports. By doing this it will mean that the UK will no longer suffer from interdependancy and the limited supply of cars if growth shocks were to reoccur in Germany.

Again you are right in saying that it will reduce growth and it does contradict the initial objective which is to receive goods and services more easily. Therefore your point could be used as an evaluation once more by saying that protectionist measures are likely to limit growth in the short run until UK firms produce enough cars to meet supply in the long run.

Any more questions are happily welcomed.
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mangala
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could reduce unemployment to 0 through communism
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Satoshii
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(Original post by KingPap)
Protectionism is imposed in order to limit free trade. Although free trade has its advantages, it also has many disadvantages that make a country vulnerable to growth shocks like on supply. For example one disadvantage of free trade is interdependancy which typically means that a country relies too heavily on an import. To make things simple lets say that the UK is highly dependent on car imports from Germany. If there are growth shocks in Germany, meaning that their supply of cars is low, the UK will find it increasingly difficult to obtain to import. Consequently, the UK will impose protectionist measures such as tariffs in order to incentives UK firms to produce cars and so lower their reliance on German imports. By doing this it will mean that the UK will no longer suffer from interdependancy and the limited supply of cars if growth shocks were to reoccur in Germany.

Again you are right in saying that it will reduce growth and it does contradict the initial objective which is to receive goods and services more easily. Therefore your point could be used as an evaluation once more by saying that protectionist measures are likely to limit growth in the short run until UK firms produce enough cars to meet supply in the long run.

Any more questions are happily welcomed.
dam you eco beast, absolutely aced the question thanks a million, i'll defo be returning to you for more questions if thats okay haha xD
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