Question

US has raised tariff on imported products from China.

1.Use aggregate demand and supply model to analyze short run impact on China's nominal exchange rate.

2. Use model to analyze US real interest rate,real exchange rate

Answer 1

1. The recent ongoing China and US trade war has given a sharp decrease in trade, increased prices for customers and trade differences effects. As the tariffs on imported products from China has increased in US, the domestic aggregate demand has been increased and domestic aggregate supply has ended up decreasing in the economy. The higher prices of the imported goods from China has resulted in diverting the purchases of the goods in the economy. In result of which, the supply of imported resources have faced a heavy decrease in US. Due to this, the currency of the country has devaluated, and the imports have become costlier. Not only currency, but the GDP of China has also suffered a major decrease, because of which the nominal exchange rate of the economy has came down, in comparison with the earlier situations. 2. The US real interest rate means the actual rate on which the investment criteria is involved. The real interest rate is important for the rate of return and to analyse the effectiveness of the investment proposals. The real exchange rate measures the value of currencies taken into account and it is related to the price level changes. In this case, the value measurement is as per the average price level in the country.