Apply AD-AS model and a suitable measure of external balance to explain what happen to an economy on the gold standard at an overvalued exchange rate

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Apply AD-AS model and a suitable measure of external balance to explain what happen to an economy on the gold standard at an overvalued exchange rate

The level of Macroeconomics is concerned either on with the economy as a whole or with the basic subdivisions of aggregates - such as government, household and business sectors - which meke up the economy. An aggregate is a collection of the specific economics units which are treated as if they were one unit. Macroeconomics overviews all economy by generally outlining the mainest aggregates which construct the economy. That's why such words as total, general are always used in Macroeconomics. That is the part of eco-nomics concerned with the economy as a whole; with such major aggregates as house-holds, business and governmental sectors and with totals for the ec. So, tha basical Macro-economics indicators are: Gross National Product (GNP), Price level, Interest Reate and Employment(Sullivan, 2003).

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 in demand of Australian goods and services. Therefore, the exports of Australian goods and services would fall accordingly as this phenomenon implies the reduction of Australian competitiveness. Simultaneously, the imports of overseas goods and services would rise to maintain the constant supply of the goods and services(Caldwell, 2004).

Hence, this could lead to a possible external imbalance with a falling Australian dollar value and worsened Current Account Deficit (CAD). As for the firms in Australia, they will start to cut down their production of the goods and services to remove the surplus of their goods and services because in such condition, producers find it less profitable to produce. In addition, there ...