Selected questions – IBDP Economics – Set #1

Firstly the Egyptian economy enjoys a floating exchange rate, which mean that the value of the currency is determined by the demand and supply forces, the increase in the value of the Egyptian pound would mean that the currency appreciated, appreciation of currency is defined as the increase in its equilibrium price , the inflation rate is the increase in the average price level of goods and services within the economy during a specific year , while the economic growth means the increase in the productive capacity of the economy from a year to another.

The appreciation of the Egyptian pound would result in increasing the purchasing power in the local economy , this increase in the purchasing power would mean that each pound can buy more goods and services , according to the rationality of the economic theory , this would result in increasing demand for goods and services in the market , thus , a demand pull inflation might happen due to the increase in the aggregate demand as shown in the next diagram.

As shown in the above diagram, the increase in the ability of the consumers to buy through the appreciation of the Egyptian pound and the increase in their willingness to buy due to optimism in the economy would result in shifting the aggregate demand to the right from AD1 to AD2 formulating a new equilibrium point B instead of old equilibrium A at a higher price level and a higher real GDP.

In the same time, the increase in the demand for goods and services in the market will stimulate producers to increase their level of production which will decrease the unemployment rate , since unemployment is defined as the people who are willing and able to work but cannot find a job , this means that the employment levels in the economy will increase since the demand for workers is a derived demand from the goods and services that the workers are making .

Following to the increase in the level of employment, this would mean that the use of the resources within the economy will increase, meaning that the level of production will increase and hence this reflects in the market into an economic growth, according to the previously plotted diagram the increase in the economic growth is reflected in the increase in the real GDP from Y1 to Y2.

In conclusion, the increase in the value of the Egyptian pound would mean that the economy will go to a social welfare level that result in an increase in the level of economic activity with less regard to the consequence of inflation among the market.