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Determining the effects of a situation on the economy.

Consumer-entrepreneurs set up a small-scale production plant on their side of the river, offering competition to the producers on the other side. Unfortunately, without proper licensing this production plant is technically illegal. Accordingly the consumer-entrepreneurs have to sell thier product at a price 20% higher than the producers on the other side. What will happen to the economy now?

a. aggregate demand will increase
b. aggregate demand will decrease
c. aggregate supply will increase
d. aggregate supply will decrease

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The answer should be "b". I would reason it with this simple example. Recently in Canada, the value of the Canadian dollar has increased over 10% relative to the US dollar. While the increase is welcomed by Canadians who wish to travel in the US and need to purchase ...

Solution Summary

Determining the effects of a situation on the economy. A multiple choice question with an explained answer.

This solution is comprised of a detailed explanation of the impact of currency appreciation on economic purchasing power. Supplemented with more than 200 words of text, this step-by-step explanation of this complicated topic provides students with a clear perspective of the power of currency change on the export/import market.