Exchange Rates

Question 1

define ER - what is the current ER

Answer 1

price of one country’s currency in terms of another countrys currency
0.72 USD

Question 2

what is the trade weighted index

Answer 2

an index showing the value of a countrys currency in relation to a basket of currencies weighted according to their importance in trade flows with Australia

Question 3

what line shifts if a country swaps their currency for ours

what line shifts if we swap our currency for another counrys

Answer 3

demand shifts

supply shifts

Question 4

Appreciation:
Depreciation:

Answer 4

D(AUD) increases or S(AUD) decreases

D(AUD) falls or S(AUD) increases

Question 5

what are the 2 ways a countrys currency is determined

Answer 5

floating - d/s

fixed - artifically set

Question 6

what is a demand for our currency

Answer 6

transactions that result in an inflow of money into CA and FA (exports) - foreign investment into Aus

Question 7

what is a supply of our currency

Answer 7

transactions that result in an outflow of money (imports) - investment abroad

Question 8

what is a free floating ER

Answer 8

value determined by d/s - price changes whenever ds shifts

Question 9

what are the 3 types of floating ER

Answer 9

1. clean float - no influence
2. managed float - intervention from time to time
3. dirty float - constant intervention that sets price

Question 10

what are the 2 ways RBA changes ER

Answer 10

1. acts as buyer or seller of currency

2. change interest rates

Question 11

what are the 3 ways Free ER effects BOP

Answer 11

1. provides auto adjument in the BOP
2. reduces fluctuations in the CAB
3. Stops pos (app) and neg (dep) shock from appreication/depreication

Question 12

what is the cost of FFER and how is it fixed

Answer 12

uncertainty

foreign exchange hedging - buy currencies in future market at set prices

Question 13

what was:
ER in 2020
ER in 2011

Answer 13

0. 62

1. 1

Question 14

what are the 6 broad factors affecting ER

Answer 14

1. inflation rates (neg)
2. ToT (pos)
3. Capital FLows (pos)
4. Domestic Econ growth (Neg - pos)
5. World Econ Growth (pos)
6. Relative Interest Rates (pos)

Question 15

what are the 2 main factors

Answer 15

1. commodity prices

2. interest rate differential with USA

Question 16

what is the IRD

Answer 16

measured by the difference in 10 year gov bond rates beteween 2 countries (aus - US = 0.19% in 2020)
if IRD falls, aus depreciates

Question 17

what are the 4 pos effects of depreciation

Answer 17

• Capital inflow into the industries of the imported and exported goods industries
• increase exports and decrease imports, increasing aggregate demand in economy
• Reduces trade deficit and expands the economy
• exporters and domestic producers of imports benefit

Question 18

what are the 2 neg effects of edepreication

Answer 18

• Hurts consumers as they must pay higher prices for imported goods (cars, appliances, travel)
• Promotes inflation: higher priced imports feed into the CPI, increases income and spending

Question 19

what are the 4 pos effects of appreciation

Answer 19

• Reduces the prices of overseas goods to Aus producers and consumers
• Aus business that sell imported good (department stores) will benefit
• Australian tourists benefit
• Reduces the inflation rate by rising prices of imports

Question 20

what are the 3 neg effects of appreciation

Answer 20

• Harms Australian exports because it makes our exports more expensive overseas
• Domestic manufacturers lose out as consumers are more attracted to cheaper imports
• Decreases trade balance as it reduces net exports and decreases aggregate demand therefore will have a contractionary effect on the economy