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ECONOMICS YR 12 > Part Four: Australia's Place in the Global Economy > Flashcards

Part Four: Australia's Place in the Global Economy Flashcards

1
Q

Define Exchange Rates

A

An exchange rate is the price of one countries currency in terms of another

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2
Q

What is the Trade Weighted Index, and why is it the better way of measuring

A

Measures the movements in the Australian dollar against a basket of currencies of Australia’s trading partners, weighted according to their importance in Australia’s trade

It is more accurate and important measure of the Australian dollars purchasing power because it is related to changes in Australia’s balance of payment perfomance over time

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3
Q

What is a bilateral exchange rate

A

Measure the value of a unit of domestic currency relative to another currency

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4
Q

What is the indirect method of measuring exchange rates

A

The rate of exchange between A UNIT of domestic currency and the equivalent amount in foreign currency \
e.g. AU$1.00 = US$0.71

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5
Q

What is the direct method of measuring exchange rates

A

The rate of exchange between the amount of domestic currency needed to purchase A UNIT of foreign currency
e.g. US$1.00 = AU$1.41

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6
Q

What is derived demand

A

Is the demand for Australian dollars in the foreign exchange market (forex)

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7
Q

What are the factors affecting the supply of Australian dollars

A
  1. The wish of Australians to purchase goods and services from overseas, requiring payment in foreign currency
  2. Decisions to invest overseas (capital outflow)
  3. The need to pay interest and dividends on overseas loans and investments
  4. Current transfers made out of Australia
  5. Speculators who want US dollars because they expect the value of the US dollar to rise
  6. Tourists travelling overseas
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8
Q

What is Appreciation

A 
Refers to the exchange rate of a nation's currency rising in terms of another country's currency 
e.g. Day 1: AU$1.00 = US$0.90
       Day 2: AU$1.00 = US$0.92
Increased Demand for A$
Decreased Supply of A$
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9
Q

What is depreciation

A 
Refers to the exchange rate of a nation's currency falling in terms of another country's currency 
e.g. Day 1: AU$1.00 = US$0.90
       Day 2: AU$1.00 = US$0.89
Decreased Demand for A$
Increased Supply of A$
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10
Q

What are the main factors causing an appreciation of the Australian Dollar

A
  1. An increase in Australian interest rates or decrease in overseas interest rates
  2. Improved investment opportunities in Australia or deterioration in foreign investment opportunities
  3. A rise in commodity prices and an improvement in Australia’s Terms of Trade
  4. An improvement in Australia’s IC
  5. Lower inflation in Australia
  6. Increased demand for Australia’s exported goods and services
  7. Expectations of a currency appreciation based on forecasts of one of the above factors
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11
Q

What are the main factors causing a depreciation of the Australian Dollar

A
  1. An decrease in Australian interest rates or increase in overseas interest rates
  2. Deterioration in investment opportunities in Australia or improvement in foreign investment opportunities
  3. A fall in commodity prices and an deterioration in Australia’s Terms of Trade
  4. A deterioration in Australia’s IC
  5. Higher inflation in Australia
  6. Increased demand for Australia’s imported goods and services
  7. Expectations of a currency depreciation based on forecasts of one of the above factors
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12
Q

How does the RBA influence Exchange Rates

A
  1. Targetting
  2. Smoothing and Testing
  3. Interest Rates
  4. Jawboning
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13
Q

What is a fixed exchanged rate

A
  • Set by the government, case in Australia till 1983, RBA determined exchange rate
  • Fixes exchange rates may sometimes require some intervention by the govt. or the central bank
  • The decision to alter the exchange rate requires absoulate secrecy to avoid large movements of currency as speculators attempt to make profits from the change in the exchange rate
  • A downwards movement is called devaluation
  • An upward movement is called revaluation
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14
Q

What is a flexible/floating exchange rate

A
  • Allows the market to set the rate, will move in response to the supply and demand of currency in the market
  • A clean float is when there is no government intervention in the determination of the exchange rate
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15
Q

What is a managed exchange rate

A
  • Is the official intervention in the setting of an exchange rate
  • Is adjusted daily to variations in a major trading partner’s currency
    e. g. China uses a managed exchange rate system by pegging the RMB to movements in a basket of currencies of its major trading partners
  • A dirty float occurs when the RBA buys and sells foreign currencies on the free market to smooth out short term fluctuations
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16
Q

What is the difference between a sterlised forex intervention and an unsterilised forex intervention

A

Sterlilised: RBA offsets its transaction by buying or selling the equivalent amount of government securities, leaving the monetary liabilites of the RBA unchanged

Unsterilised: Involves no such offsetting purchase or sale of govt. securities. Sale of foreign currency will lead to a fall in the money supply and a rise in intertst rates. Purchase of foreign currency will lead to a rise in the money supply and a fall in interest rates

17
Q

What is a managed exchange rate

A
  • Is the official intervention in the setting of an exchange rate
  • Is adjusted daily to variations in a major trading partner’s currency
    e. g. China uses a managed exchange rate system by pegging the RMB to movements in a basket of currencies of its major trading partners
  • A dirty float occurs when the RBA buys and sells foreign currencies on the free market to smooth out short term fluctuations
18
Q

What are the positive effects of fluctuations in exchange rates on the Australian economy

A
  • Increased Purchasing Power –> Higher standards of living
  • Short-term improvement in TOT and CAD
  • Decreased interest in debt servicing costs
  • Lower inflationary pressures
19
Q

What are the negative effects of fluctuations in exchange rates on the Australian economy

A
  • Decreased IC
  • J-Curve: Relationship between BOP and Exchange Rates
  • Slower economic growth
  • Decreased investment in Australia
  • Worsened CAD
20
Q

What are the advantages of a floating ER

A
  • More market-determined price for the currency
  • Discourage destablishing speculation about the future value of the currency
  • More independent and effective monetary policy
  • Provides insulation properties
  • Consistent with major trading partners
21
Q

What are the disadvantages of a floating ER

A
  • Increase in votality over time

- ‘Overshooting’: Currency can appreciate/depreciate more than anticipated

ECONOMICS YR 12 (16 decks)

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