Assume that initially the economy is at the equilibrium level of output where aggregate demand equal to aggregate supply and this is shown diagrammatically below.Aggregate demand is the quantity of total output demanded at a given price level and comprises total of all the consumption and investment goods and services as well as the required goods and services of the government and net exports. A sustained appreciation of the local currency would bring about negative effects to the economy in the short and long term. In the short term, the price of local goods and services would be relatively expensive to the goods and services of other countries which would consequently lead to a fall ...view middle of the document...
In the long term, a decrease in aggregate demand is not desirable because it could lead to a recession in the business cycle or the economic activity. This phase is characterized by such conditions such as a fall in the rate of economic growth, decreasing employment and higher levels of job vacancies and a reduction in the rate of prices or wages growth. There are four major macroeconomic objectives that each government would strive to achieve. They are price stability, full employment, economic growth and external balance in equilibrium. In order to improve the economic activity, there are two options for the government to undertake. They are the expansionary policies which are demand management policies or microeconomic reforms of the supply management policy.Expansionary policies such as fiscal and monetary policies indeed can stimulate the aggregate demand but they have destabilizing side effects that may impose more problems to the economy. For instance, expansionary fiscal policy like lower direct and indirect taxes may experience higher consumption fairly shortly after implementation. This however, may affect its productivity adversely if the increase in aggregate demand leads to an increased interest rates which are contractionary. As for expansionary monetary policy which is of attempts like lowering the interest rates, ease of obtaining credit facilities and increasing the issue of credit card applications is time-consuming and this can help to reach the full employment objective but also, worsening the price stability objective.On the other hand, supply management policy is directed towards improving producers' ability to reduce costs of production and to increase efficiency or productivity thus lifting the competitiveness of suppliers goods and services on the wo...
