Relationship between appreciation and inflation and unemployment. (1 Viewer)

[ebbygoo]

Hey guys.

Can someone please explain why;
a) inflation decreases as appreciation occurs; just not get why for this one.
b) why unemployment decreases when appreciation occurs; this one particularly confuses me. My approach to it was that appreciation would mean less exports which would mean less jobs, but the data reflects the opposite.

Thanks.

 

[enigma_1]

Hey guys.

Can someone please explain why;
a) inflation decreases as appreciation occurs; just not get why for this one.
b) why unemployment decreases when appreciation occurs; this one particularly confuses me. My approach to it was that appreciation would mean less exports which would mean less jobs, but the data reflects the opposite.

Thanks.

a) As the AUD appreciates, our exports become more expensive for foreign countries and hence it reduces our competitiveness. But, our imports become cheaper. So, M>X which increases Australian consumers' purchasing power parities (ie we can buy more of the same amount of goods). This is bascially the opposite of inflation. Hence, we can conclude that inflation decreases as an appreciation occurs because Australian consumers can buy more for the same amount of goods.

Inflation is actually defined as a fall in purchasing power parities, and what is described above is the opposite of this, hence appreciation of $A --> lower inflation.

b) I can't actually think of why that's the answer for this one, sorry I'll think about it.

 

[ebbygoo]

a) As the AUD appreciates, our exports become more expensive for foreign countries and hence it reduces our competitiveness. But, our imports become cheaper. So, M>X which increases Australian consumers' purchasing power parities (ie we can buy more of the same amount of goods). This is bascially the opposite of inflation. Hence, we can conclude that inflation decreases as an appreciation occurs because Australian consumers can buy more for the same amount of goods.

Inflation is actually defined as a fall in purchasing power parities, and what is described above is the opposite of this, hence appreciation of $A --> lower inflation.

b) I can't actually think of why that's the answer for this one, sorry I'll think about it.

Thanks I get the first one now