Trade and Globalisation - L6 Exchange Rates

Question 1

What are the key factors that drive demand for AUD?

Answer 1

Overseas rates of growth and demand for exports

Movement in the Terms of Trade

Relative interest rates

Question 2

If there was a decrease in demand for Australian exports, there would be a _____________ in demand for the $AUD and therefore a __________________ of the $AUD.

Answer 2

decrease
depreciation

Question 3

If the terms of trade rises, it means that we are receiving __________ prices for our exports relative to our imports. This would result in ___________ demand for the $AUD leading to an __________________ of the $AUD.

Answer 3

higher
increased
appreciation

Question 4

Define the term relative interest rates.

Answer 4

refers to the general level of interest rates in Australia compared to other countries (e.g. USA).

Question 5

In its next meeting, if the RBA decides to increase the cash rate from 4.35% to 4.5%, this could result in an appreciation in the Australian dollar because …

Answer 5

this is likely to lead to foreign investors seeking the higher return on offer from Australian banks, leading to an increase in demand for the AUD so they can invest.