How changes in the exchange rate affect aggregate demand and the various macroeconomic policy objectives
When a currency rises or falls in value, it changes the price of exports and imports. This shifts aggregate demand — total spending in the economy — and affects inflation, growth, employment, and the trade balance.
Formula
AD = C + I + G + (X − M)
Real World
After the pound fell sharply following the 2016 Brexit vote, UK car exports became cheaper for American buyers, boosting Jaguar Land Rover's overseas revenues — but rising import costs pushed up UK inflation simultaneously.
Exam Focus
Always evaluate both sides: a depreciation raises net exports but also raises import-cost inflation — one-sided answers are capped at Level 2.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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