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1) For many years, farmers complained that the value of the New Zealand Dollar was too high. We know that a high value of the
1) For many years, farmers complained that the value of the New Zealand Dollar was too high. We know that a high value of the NZD means that exports are relatively expensive for overseas buyers, so it makes sense that a high NZD would hurt them. In 2018, the farmers got their wish. The value of the NZD began to fall: a) Let us consider a situation where the exchange rate falls due to some outside factor. What happens to Aggregate Demand? Why does this occur? Link your answer back to the fall in the exchange rate. b) Using the change you have identified in a) to AD, what should happen to the inflation rate and growth rate in the economy when this change is considered on its own? c) What happens to Short-run Aggregate Supply when this happens? Why? Again, link your answer to the fall in the exchange rate. d) Using the change you have identified in c) to SAS, what should happen to the inflation rate and growth rate in the economy when this change is considered on its own? e) Draw the effects from a) and b) out in an AD-AS diagram, labelling all the axes, curves, and shifts. What happens to the inflation rate and the growth rate in the economy? Hint: you should find that one of these is an ambiguous change!]
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