Question
How will I sketch a new exchange rate diagram and label it D¹ and S¹ if the merchandise exports to Australia as increased or appreciated?
Answers
Answered by
GPT-4o mini
To sketch a new exchange rate diagram reflecting an increase in merchandise exports to Australia, follow these steps:
1. **Draw Axes**: Start by drawing a standard supply and demand diagram. The vertical axis represents the exchange rate (for example, the value of your currency in terms of Australian dollars), and the horizontal axis represents the quantity of the currency (in this case, your currency).
2. **Initial Curves**: Label the initial demand curve for your currency as **D** (for demand) and the initial supply curve as **S** (for supply). These curves can be labeled with a subscript 0, such as D₀ and S₀, to indicate you are starting from an initial equilibrium. Mark the intersection of D₀ and S₀ as the initial equilibrium point (E₀), where the initial exchange rate and quantity are determined.
3. **Shift in Demand**: Since merchandise exports to Australia have increased, this means that Australia will demand more of your country's currency to pay for those exports. Therefore, you will need to shift the demand curve to the right. Label the new demand curve as **D¹**.
4. **New Equilibrium**: The new equilibrium point (E¹) will be where the new demand curve D¹ intersects the original supply curve S₀. Mark this intersection on your diagram. The new exchange rate at this point will be higher than the original exchange rate, indicating that your currency has appreciated against the Australian dollar.
5. **Label Everything**: Clearly label the new curves (D¹ for the increased demand and S₀ for the unchanged supply), the initial equilibrium (E₀) and the new equilibrium (E¹), and indicate the shifts in the curves.
6. **Add Arrows**: You may also want to add arrows on the demand curve to indicate its shift from D₀ to D¹, reflecting the increase in demand due to rising exports.
Your diagram will effectively illustrate how the increase in merchandise exports to Australia has led to an appreciation of your currency, shifting the demand curve to the right.
1. **Draw Axes**: Start by drawing a standard supply and demand diagram. The vertical axis represents the exchange rate (for example, the value of your currency in terms of Australian dollars), and the horizontal axis represents the quantity of the currency (in this case, your currency).
2. **Initial Curves**: Label the initial demand curve for your currency as **D** (for demand) and the initial supply curve as **S** (for supply). These curves can be labeled with a subscript 0, such as D₀ and S₀, to indicate you are starting from an initial equilibrium. Mark the intersection of D₀ and S₀ as the initial equilibrium point (E₀), where the initial exchange rate and quantity are determined.
3. **Shift in Demand**: Since merchandise exports to Australia have increased, this means that Australia will demand more of your country's currency to pay for those exports. Therefore, you will need to shift the demand curve to the right. Label the new demand curve as **D¹**.
4. **New Equilibrium**: The new equilibrium point (E¹) will be where the new demand curve D¹ intersects the original supply curve S₀. Mark this intersection on your diagram. The new exchange rate at this point will be higher than the original exchange rate, indicating that your currency has appreciated against the Australian dollar.
5. **Label Everything**: Clearly label the new curves (D¹ for the increased demand and S₀ for the unchanged supply), the initial equilibrium (E₀) and the new equilibrium (E¹), and indicate the shifts in the curves.
6. **Add Arrows**: You may also want to add arrows on the demand curve to indicate its shift from D₀ to D¹, reflecting the increase in demand due to rising exports.
Your diagram will effectively illustrate how the increase in merchandise exports to Australia has led to an appreciation of your currency, shifting the demand curve to the right.
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