QUESTION 6 How will the Australian exchange rate (foreign currency per AUD) resp

Question

QUESTION 6 How will the Australian exchange rate (foreign currency per AUD) respond to an increase in the preference for imported goods by Australians irn the long run, ceteris paribus? AUD will appreciate again other currencies. O AUD will depreciate against other currencies. OExchange rates of AUD will e unaffected by changes in the preference for imported goods by Australians, both in the short run and in the long run. O The exchange rates of AUD will be affected in the short run, but not in the long run. QUESTION 7 A country that imports a significant proportion of ts consumer goods can avoid infation by adopting a fixed exchange rate because it can avoid the price increases of e___ that occur when the value of the domestic currency imports; rises O imports; falls exports; rises exports: falls

Explanation / Answer

Question 6:

An increased demand for imports in the home country causes the demand for foreign currency to increase (to buy imported goods). The demand for home currency falls, while the supply increases (as a result of population demanding foreign currency and giving up AUD).

Thus, the value of the AUD falls, that is, AUD depreciates against other currencies as a result of a short demand and excess supply.

Therefore, the correct answer is option b) AUD will depreciate against other currencies.

Question 7:

An increased demand for imports causes the home currency to depreciate. Also, since major consumer goods are imported, the supply of home currency increases (to buy imported goods, one needs foreign currency). As a result of this increased supply of home currency, the interest rates falls. This causes foreign investments to decline.

To balance this increase in money supply, the central bank comes into action and absorbs the excess domestic money supply. This aids in reducing the inflation, along with the government controlling the exchange rate. The fixed exchange rate controls the fall in the value of home currency. This helps to control the falls in exports when the inflation kicked in since a high price makes the domestic goods less competitive in the world markets.

Therefore, a country that imports a significant proportion of its consumer goods can avoid inflation by adopting a fixed exchange rate because it can avoid the price increases of exports that occur when the value of the domestic currency falls.

Thus, the correct answer is option d) exports; falls.

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