FIGURE 9.1 Problem 17d 105 100 95 90 85 80 Do 100 200 300 400 500 600 700 800 Qu
ID: 1124142 • Letter: F
Question
FIGURE 9.1 Problem 17d 105 100 95 90 85 80 Do 100 200 300 400 500 600 700 800 Quanlily Ibillions of Australian dellars per day a. What has happened to the demand for Australian dollars? What could have caused this? (2 marks) b. What is the new exchange rate of Australian dollar against the Yen? What effect would this new exchange rate have on exports to China? Explain why. What would happen to the quantity of Chinese imports with this new exchange rate? (4 marks) If the Australian central bank lowered interest rates on the Australian dollar, what would happen to the demand for that currency? c. What would happen to its value? How and why would GDP of Australia be affected?Explanation / Answer
Answer (a) - Demand for Australian dollar has been increased. Demand curve for Australian dollar has shifted to the right. It might be caused by change in preference of Chinese investors. Now, Chinese investors demand more Australian dollar in order to invest in Australia.
Answer (b) - New exchange rate is 95 yen per Australian dollar. Initial exchange rate was 90 yen per Australian dollar. A Chinese buyer have to pay 95 yen for a dollar where it was paying 90 yen before demand increase, Chinese yen has been depreciated. Depreciation of yen's will increase Chinese exports. Imports will decrease and exports will rise in the China. Exports to China will decrease because goods and service become dearer in the china.
Answer (c) - The Australian central bank has lowered the interest rate on the Australian dollar, it result fall in demand for Australian dollar. Lower interest rate would be unattractive to the foreign investors. Lower interest rates decrease the relative value of currency. Thus demand for Australian dollar will fall.
The value of Australian dollar will decrease. In Australian GDP will decrease because lower foreign investment. Foreign investors do not find Australia a right investment destination.
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