Trade and Globalisation - L5 Exchange Rates

Question 1

Define the term, Currency.

Answer 1

a system of money used in a particular country.

Question 2

Define the term,
Exchange Rate.

Answer 2

the price at which one currency is exchanged for another.

Question 3

Explain the difference between appreciation and depreciation of $AUD.

Answer 3

An appreciation of the $AUD means an increase in value compared against other currencies. Whereas a depreciation of the AUD compared against other currencies means a decrease in value.

Question 4

If a $1.0 AUD was worth $0.74 USD and now is worth $0.59 USD has it appreciated or depreciated in value?

Answer 4

Depreciated

Question 5

Is this good or bad or the Australian economy? Explain your answer.

Answer 5

A depreciation of the Australian dollar is good for the Australian economy because it will result in our exports being cheaper in foreign currency terms, leading to an increase in net exports as consumers in the economies of our major trading partners consume more Australian made goods and services.

This will lead to an increase in aggregate demand, as producers respond by increasing the production of goods and services, increasing levels of economic activity and creating more jobs.

Question 6

What does international competitiveness measure?

Answer 6

a country’s ability to compete in global markets for goods and services.

Question 7

An appreciation of the Australian dollar is bad for the Australian economy because…

Answer 7

It will result in our exports being more expensive in foreign currency terms, leading to a decrease in net exports as consumers in the economies of our major trading partners consume fewer Australian made goods and services.

This will lead to a decrease in aggregate demand as producers respond by decreasing production of goods and services, decreasing levels of economic activity and creating fewer jobs.