Exchange Rates Flashcards
define ER - what is the current ER
price of one country’s currency in terms of another countrys currency
0.72 USD
what is the trade weighted index
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
what line shifts if a country swaps their currency for ours
what line shifts if we swap our currency for another counrys
demand shifts
supply shifts
Appreciation:
Depreciation:
D(AUD) increases or S(AUD) decreases
D(AUD) falls or S(AUD) increases
what are the 2 ways a countrys currency is determined
floating - d/s
fixed - artifically set
what is a demand for our currency
transactions that result in an inflow of money into CA and FA (exports) - foreign investment into Aus
what is a supply of our currency
transactions that result in an outflow of money (imports) - investment abroad
what is a free floating ER
value determined by d/s - price changes whenever ds shifts
what are the 3 types of floating ER
- clean float - no influence
- managed float - intervention from time to time
- dirty float - constant intervention that sets price
what are the 2 ways RBA changes ER
- acts as buyer or seller of currency
2. change interest rates
what are the 3 ways Free ER effects BOP
- provides auto adjument in the BOP
- reduces fluctuations in the CAB
- Stops pos (app) and neg (dep) shock from appreication/depreication
what is the cost of FFER and how is it fixed
uncertainty
foreign exchange hedging - buy currencies in future market at set prices
what was:
ER in 2020
ER in 2011
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1. 1
what are the 6 broad factors affecting ER
- inflation rates (neg)
- ToT (pos)
- Capital FLows (pos)
- Domestic Econ growth (Neg - pos)
- World Econ Growth (pos)
- Relative Interest Rates (pos)
what are the 2 main factors
- commodity prices
2. interest rate differential with USA
what is the IRD
measured by the difference in 10 year gov bond rates beteween 2 countries (aus - US = 0.19% in 2020)
if IRD falls, aus depreciates
what are the 4 pos effects of depreciation
- 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
what are the 2 neg effects of edepreication
- 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
what are the 4 pos effects of appreciation
- 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
what are the 3 neg effects of appreciation
- 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