Factors Affecting ER

Question 1

what are the 5 factors affecting ER

Answer 1

1. relative inflation
2. movement in ToT
3. International Capital Flows
4. Domestic Economic Growth
5. World Economic Growth
6. Relative Interest Rate

Question 2

relative inflation: describe

Answer 2

inflation reduces competitivness in the traded goods sectors. high inflation decreases AUD

Question 3

movement in ToT: describe

Answer 3

ToT rises AUd rises

Question 4

International Capital Flows: descrive

Answer 4

if investors like Aus, demand for AUD increases and AUd appreciates

Question 5

Domestic Economic Growth: descrive

Answer 5

strong growth in Aus, increases quantity of imports S(aud) increases so AUd depreciates.
It also attracts foreign investment so it appreciates

Question 6

World Economic Growth: describe

Answer 6

increase in global GDP increases commodity prices aud appreciates

Question 7

Relative Interest Rate: descrive

Answer 7

if USA rates increase relative to AUs, capital inflwo to Aus falls and outflow rises. D(AUD) falls and S(AUD) increases = strong depreciation

Question 8

what are the 2 main factors

Answer 8

1. commodity prices

2. Interest rate Differential with USA

Question 9

describe the relationship between commodity prices and er

Answer 9

strong positive correlation between com prices and AUD movement

Question 10

how is the interest rate differential measured

Answer 10

measured by difference in 10 year government bond rates between two countries (Aus - US

Question 11

what is the relationship between IRD and AUD

Answer 11

strong positive relationship

Question 12

how does IRD affect flow of foreign investment

Answer 12

investors look for highest return, if interest rates in Aus fall relative to US, IRD falls AUD falls (investors leave)