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In late last year starting from November 2018, the stock markets in the Wall Street has...

In late last year starting from November 2018, the stock markets in the Wall Street has shown an unexpected level of ups and downs (with almost wiping out 2018 gains in equity market) mainly attributed to the uncertainty caused by Trump’s Trade War policy with China and EU, falling oil prices, and other possible cutting govt. programs (in an effort to reduce budget deficit). In the process, the value of the $ has also shown a high degree of volatility against the Euro, the Yuan (Renminbi), yen and many other major currencies.

A) Given the current condition of the US economy, do you think US policy makers would prefer to see the $ rise in value, decline in value or stay at its current value? Discuss the advantages and disadvantages to the US economy at this time of a stronger vs. a weaker $. Frame your answer in terms of the current Aggregate Demand and Aggregate Supply situation of the US economy.

B) Draw an AS/AD diagram to illustrate your answers for Question A) above. Clearly label axes and the current position of AS & AD relative to full employment RGDP….also indicate any shifts that would occur if the exchange rate of the $ rose sharply against other major currencies

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a) For past couple of we days we continually heard news in regards to the firm exchange war of US with China, the Lira emergency in Turkey, the oil endorses on Iran and so forth. At first sight every one of these occasions looks detached, yet a profound examination and an exhaustive comprehension of the subject demonstrates that every one of these occasions prompts a certain something: precariousness in World Economics with US at its inside stage. From day 1 of assuming office, President Trump focused orn America first, indicating that he wants an American Economy which is built by the Native Americans and not by immigrants or foreign products. Thus he took all the measures to support domestic industry by imposing tariff on American goods to warning Harley Davidson of not taking its manufacturing units outside USA. He continued defense deals with Saudi Arabia and waived sanctions under CAATSA from India despite its deal of S-400 missile system from Russia. All this points towards one thing that US want to export more. Given its history of a persistent Trade Deficit with almost all major trade partners, US now wants to change sides. This means that production and export of goods and services needed to be enhanced As per our knowledge about the exchange system in International Trade, a nation with lower exchange rates as compared to another country attracts much of the foreign trade. It is because a weak currency means that people can buy more by spending less in foreign nation. Thus at present US policy makers would like to see a weak Dollar so that exports can be boostedWe also saw that since 2015, for the record 8-times Fed has increased the interest rates, making investment costlier in US. This not only affects investors sentiments, but also improves the position of USD since people would be more interested in purchasing US bonds as it will yield more returns. This is exactly opposite to what government wants. President Trump has openly criticized this policy and has said that this will hurt US. On the other hand Fed said that US is in better position to absorb these hikes. A weaker USD will make investments cheaper, exports cheaper and imports costlier, thus improving overall trade deficit situation, while a strong USD will reduce exports, increase imports and will widen the deficit. b) Given the current condition of the US economy, we believe that the US policy makers would prefer to see the USD to decline in value. A strong dollar makes US goods expensive so that net exports fall. A fall in net exports implies trade deficit and worsening of balance of payment. When the US dollar makes domestic producers losing money in reduced exports, domestic firms might locate themselves out in other nations so there will be a job loss as well. In terms of AD-AS, this implies a reduction in net exports and so AD shifts left, reducing price and RGDPAS AD Real outputA weak dollar makes US goods cheaper so that net exports rise. A rise in net exports implies trade surplus and improvement in unbalance of payment. When the US dollar makes domestic producers earning more money by increasing exports, domestic firms might expand while for domestic consumers a weak USD implies expensive foreign goods in terms of imports. In terms of AD-AS, this implies a rise in netexports and so AD shifts right, increasing price and RGDPAS AD Real outputGiven the job losses and a decade long migration of domestic firms outside the economy does not support a strong USD

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