Relationship Between BOP and A$

Question 1

What would be the impact of an increase in the value of imports on the A$?

Answer 1

Deterioration in the CAD

Increase in the supply of A$ as importers sell more to buy foreign currency

Depreciation of A$

Question 2

What would be the result of an improvement in the CAD?

Answer 2

Appreciation of A$

Question 3

What is another important factor in the BOP/exchange rate relationship?

Answer 3

Perceptions of Financial Markets

Question 4

When will speculators be less likely to purchase A$?

Answer 4

If they are concerned that a CAD increase is not sustainable

Question 5

When will speculators be more likely to purchase A$?

Answer 5

If they believe that a CAD is sustainable and have confidence in Australia’s future economic prospects

Question 6

Give an example of a positive and negative effect of an appreciation on the BOP

Answer 6

Positive - Decrease in Servicing Costs, Decreased CAD

Negative - Higher Imports Spending/Reduced Export Revenue

Question 7

Give an example of a positive and negative effect of a depreciation on the BOP

Answer 7

Positive - Australia’s exports become cheaper, leading to greater export revenue

Negative - Increases Servicing Costs, Increased CAD