The equilibrium exchange rate

What is a clean float?

When the currency is allowed to float free from the interference of the central bank

When does a managed exchange rate occur?

Whenever there is official intervention in the foreign exchange market by the Reserve Bank acting as either a buyer or a seller of currency which indirectly influences its rate.

What is a dirty float?

If the Reserve Bank wanted to prevent the exchange rate from falling to a too low level, it would enter the market as a buyer of Australian dollars and bid up the price

What is there if the exchange rate is above equilibrium?

An excess supply of AUD, forcing the price of AUD to fall

What is there if the exchange rate is below equilibrium?

There will be excess demand for AUD and the price will rise

When will a currency appreciation occur?

• the demand for Australian dollars increases

  and/or

• the supply of Australian dollars decreases

Reasons why the demand for AUD will increase

• increased demand for Australia’s exports

• increased commodity prices

• an increase in Australia’s interest rate differential attracting more foreign investment into the Australian econom

Reasons why the supply for AUD will decrease

• decreased demand for imports

• higher inflation in foreign countries

• an increase in Australia’s interest rate differential

When will a currency depreciation occur?

• the demand for Australian dollars decreases

  and/or

• the supply of Australian dollars increases

Reasons why the demand for AUD will decrease

• decreased demand for Australia’s exports

• decreased commodity prices

• a decrease in Australia’s interest rate differential attracting less foreign investment into the Australian economy

Reasons why the supply for AUD will increase

• increased demand for imports

• higher inflation in Australia relative to our trading partners

• a decrease in Australia’s interest rate differential causing a increase in Australian investment abroad