Ch5 - Exchange Rates (Extended Answer)

term 2

"What determines the value of the AUD?"

"Demand and supply in the foreign exchange market."

"What causes appreciation of the AUD?"

"Increased demand for AUD and/or decreased supply of AUD."

"What causes depreciation of the AUD?"

"Decreased demand for AUD and/or increased supply of AUD."

"What creates demand for AUD?"

Exports

"What creates supply of AUD?"

"Imports

"What is the key difference between demand and supply for AUD?"

"Demand comes from foreigners buying Australian goods/assets while supply comes from Australians buying foreign goods/assets."

"Why do exports increase demand for AUD?"

"Foreigners need AUD to buy Australian goods and services."

"Why do imports increase supply of AUD?"

"Australians sell AUD to buy foreign currency."

"What is the balance of payments?"

"A record of all international transactions."

"How does the balance of payments affect the exchange rate?"

"Inflows increase demand for AUD while outflows increase supply of AUD."

"What BOP transactions increase demand for AUD?"

"Exports

"What BOP transactions increase supply of AUD?"

"Imports

"What is the Trade Weighted Index (TWI)?"

"A weighted average of the AUD against a basket of major trading partner currencies."

"What is a commodity currency?"

"A currency heavily affected by commodity export prices."

"Why is Australia called a commodity currency?"

"Because our exports are almost all commodities like iron ore

"What are Australia's main commodity exports?"

"Iron ore, coal, NFG

"How do rising commodity prices affect the AUD?"

"Export revenue rises

"How do falling commodity prices affect the AUD?"

"Demand for AUD falls and the AUD depreciates."

"What is the interest rate differential?"

"The difference between Australian and overseas interest rates."

"How do higher Australian interest rates affect the AUD?"

"Foreign investment rises

"How do lower Australian interest rates affect the AUD?"

"Capital outflow rises

"Why do interest rates strongly affect the AUD?"

"They affect both demand and supply for AUD."

"What effect does strong world economic growth have on the AUD?"

"Demand for Australian exports rises so demand for AUD rises."

"What effect does strong Australian economic growth have on the AUD?"

"Imports rise so supply of AUD rises."

"What effect does lower Australian inflation relative to overseas have on the AUD?"

"Australian exports become more competitive so demand for AUD rises."

"What effect does higher Australian inflation have on the AUD?"

"Imports become more attractive so supply of AUD rises."

"What happens to exports when the AUD depreciates?"

"Exports become cheaper overseas and increase."

"What happens to imports when the AUD depreciates?"

"Imports become more expensive and decrease."

"What effect does depreciation have on net exports?"

"Net exports rise."

"What effect does depreciation have on GDP and employment?"

"GDP and employment rise."

"What effect does depreciation have on inflation?"

"Inflation rises because imports become more expensive."

"What happens to exports when the AUD appreciates?"

"Exports become more expensive overseas and decrease."

"What happens to imports when the AUD appreciates?"

"Imports become cheaper and increase."

"What effect does appreciation have on GDP?"

"GDP growth slows."

"What effect does appreciation have on inflation?"

"Inflation falls because imports are cheaper."

"What is the J-curve effect?"

"After depreciation the trade balance may initially worsen before improving later."

"Why does the J-curve effect occur?"

"Import prices rise immediately while quantities take time to adjust."

"What happened to the AUD in 2022?"

"The AUD generally depreciated."

"Why did the AUD depreciate in 2022?"

"US interest rates rose faster than Australia's and global uncertainty increased."

"What positive effects did the weaker AUD have in 2022?"

"Exports and tourism became more competitive."

"What negative effects did the weaker AUD have in 2022?"

"Imported inflation and overseas travel costs increased."

"What does 'explain' mean in Economics EA?"

"Give a cause-and-effect chain."

"What does 'distinguish' mean in Economics EA?"

"Explain the differences between concepts."

"What does 'outline' mean in Economics EA?"

"Give a brief explanation."

"What is the key chain for commodity prices?"

"Commodity prices rise → export revenue rises → demand for AUD rises → AUD appreciates."

"What is the key chain for interest rates?"

"Australian interest rates rise → foreign investment rises → demand for AUD rises → AUD appreciates."