1) New Zealand reduced interest rates to 2.5% as investment fell, unemployment rose, and inflation was lower than expected due to a deteriorating world economy. 2) A weak economy and reduced investment are expected to create cyclical unemployment as aggregate demand decreases and firms lay off workers. 3) A stronger than expected exchange rate might decrease New Zealand's aggregate demand through increasing imports, decreasing exports as domestic goods become less competitive, and reducing investment and employment.

1. Standard Level Nov 11
Beatriz Lombeida
Anderson Hidalgo

2. What’s the case about?
New Zealand reduced interest rates to 2.5%,
investment has fallen and unemployment has
increased but it is presenting a lower inflation
and a stronger exchange rate than from what
they expected. The world economy has
deteriorated.

3. (a) Define the following terms indicated in
the text:
♣ economic growth: it is defined as an increase in the
capacity of an economy to produce goods and services
compared from one period of time to another. It can be
represented as a shift to the right in the LRAS curve.
♣ exchange rate: is defined as the value of one currency
expressed in terms of another currency. For example 1 euro
may be exchange for 1,28 dollars.

4. (b) Using an appropriate diagram, explain the type of
unemployment that a “weak” economy and
reduced investment are expected to create.
♣ Investment is defined as capital used in order to
improve the quality and quantity of the g/s a firm
produces.
♣ Reduced investment will make AD decrease.
♣ Because AD decreases, the demand for certain
products in the nation will also decrease, making
firms have losses. In order to decrease these
losses workers will have to be laid out causing
what is called cyclical unemployment.

5.  Causes

6. (c) Using an appropriate diagram, explain how a stronger
than expected exchange rate might affect aggregate
demand in New Zealand.
♣ Aggregate Demand(AD) is defined as the total spending on goods and services in a
period of time at a given price level. It is measured by the GDP.
♣ A stronger exchange rate means that New Zealand's currency has increased its
value in terms of other currencies. In other words that it has appreciated.
♣ NZ’s currency is stronger and it could now buy more foreign g/s because they
seems cheaper to them so imports will increase.
♣ Because of the strong value of the currency, prices of domestic goods will increase
meaning that prices are less competitive in the global market. Not only the high
prices of g/s in NZ make its exports decrease but also the bad condition of the
world economy makes countries buy from other countries with cheaper prices.

7. ♣ With exports decreasing exporters will be discouraged to invest. Also they
will start firing workers because they are not selling as they did before,
causing a increase in unemployment.
♣ This decrease of exports and investment and the increase of imports will
result in a decrease in the AD as is shown in the graph.

8. (d) Using information from the text/data and your
knowledge in economics, evaluate the likely effects
of “the large decline in the official interest rate”
together with the fiscal stimuls on the New Zealand
economy.
♣ Interest rate is defined as the price of money.
Banks pay IR to people who save money and the
people who lend the money pay IR to the bank.
♣ A fiscal stimulus by the government is a increase
in Government spending.

9. ♣ Government is trying to improve the
economy because it is currently having bad
deflation.
♣ By decreasing the official interest rate the
value of the currency will decrease making
NZ’s g/s more competitive in the
international market.
♣ Exports will increase (depending on the
elasticities of the g/s) increasing AD.
♣ Also government spending increases algo
helping AD to increase

10. ♣ Low IR also increases investment
♣ Unemployment decreases.