Exchange Rates

What is the definition of an exchange rate?

The price of one country’s currency in terms of another country’s currency.

What does the trade-weighted index measure?

It provides a measure of whether the AUD is rising or falling on average against other currencies.

What is meant by a 'clean float' in terms of exchange rates?

When the exchange rate is determined by market forces of demand and supply without interference from the RBA.

What factors affect the demand for Australian dollars?

Relative price levels, world real GDP, foreign preferences for Australian goods and services, and relative interest rates.

How does an increase in the interest rate differential affect the demand for AUD?

The higher the interest rate differential, the greater the demand for Australian assets and the greater the demand for AUD.

What is the relationship between exchange rate and quantity of AUD demanded?

As the exchange rate rises, the quantity of Australian dollars demanded will fall (ceteris paribus).

What are considered the pros of a depreciation in the exchange rate?

A depreciation leads to expansion in economic activity, providing exporters a competitive advantage, and increases overseas demand for exports.

What is the 'J curve effect' in relation to trade balance?

In the short run, a depreciation initially decreases the trade balance due to relative price inelasticity of imports.

What is the potential negative impact of a depreciation in the exchange rate?

Increase in the rate of inflation due to rising import prices.

Why is the AUD known as a 'commodity currency'?

Over 70% of Australian exports are commodities, impacting demand for AUD.