In the mid-2000s both Australia and the United States had large natural resource

Question

In the mid-2000s both Australia and the United States had large natural resource production booms. Australia began to markedly increase its mining and exporting of iron ore, coal, and natural gas after large increases in commodity prices in the mid-2000s.The U.S. production boom in natural gas was attributed to new horizontal drilling technology called fracking.

Questions:

1) Which country's exchange rate would most likely be impacted by the natural gas production boom? (State the reasons for your answer)

2) Which country would most likely suffer from the Dutch Disease? (State the reasons for your answer)

Explanation / Answer

1) Australia's exchange rate is most likely be impacted by the natural gas production boom. This is because the boom is responsible for increasing commodity prices that brings inflation. When there is an inflation, combined with an economic boom, the interest rate is relatively lower and so capital outflows result in depreciating the currency. Hence inflation would have depreciated the currency

2) The United States's is most likely suffer from the Dutch Disease. This is a problem that occur when resources are drawn from the maufacturing sector to develop energy products like natural gas. When new horizontal drilling technology called fracking was introduced, a huge manpower and other resources were taken away from other sectors that is most likely to erode the profits of manufacturing sector.

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.