For each term, define what it means and then discuss how it affects Aggregate demand and aggregate...

Question

For each term, define what it means and then discuss how it affects Aggregate demand and aggregate supply. Under aggregate supply discuss institutional changes that alter the efficiency of resources. Under Aggregate demand discuss Exchange rates . Explain how the factor changed since the recession began in December 2007.

David · Accepted Answer

Before we can discuss institutional change, we must define what is meant by “institutions”. But 
in Economics literature, there is no single definition of institution. Hence it is far from a settled 
issue. There are a number of definitions, and because different authors use different definitions 
of institutions and this naturally influence their views of institutional change. According to 
Douglass North (1990), institutions “are the rules of the game in a society, or more formally, are 
the humanly devised constraints that shape human interaction” (p. 3). Institutions include any 
form of constraint that human beings devise to shape human interaction. This definition includes 
both formal and informal institutions (Lin, J. Y, n.d.). 
Institutional changes that alter the efficiency of resources, can affect aggregate supply. Major 
natural or institutional changes on the supply side of the economy that affect aggregate supply 
are referred to as supply shocks. For example, suppose that credit extended by credit cards 
became more readily available to consumers because computerization lowered transaction costs.

For each term, define what it means and then discuss how it affects Aggregate demand and aggregate supply. Under aggregate supply discuss institutional changes that alter the efficiency of resources....

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