Exchange Rate Flashcards
(16 cards)
What is the exchange rate?
The exchange rate is the price of Australia’s currency in terms of another country’s currency.
It’s necessary for international transactions, as exporters need to be paid in their own currency, and importers need to convert their currency to make payments.
What is a floating exchange rate system?
Since 1983, Australia uses a floating exchange rate system, where the value of the AUD is determined by market forces of demand and supply.
The price is decided by overseas currency buyers and local sellers.
What’s the difference between a fixed and floating exchange rate?
In a fixed exchange rate system, the government sets the currency value. In a floating system, market demand and supply decide the currency value.
What is the Traded Weighted Index (TWI)?
TWI measures the value of the AUD against a basket of currencies of Australia’s main trading partners.
It reflects global economic conditions and is different from the USD, which is more volatile.
What are the top 4 currencies by weight in Australia’s TWI?
US Dollar – 29.5%
Chinese Yuan – 13.2%
Japanese Yen – 8.8%
European Euro – 8.7%
How do you calculate the cost of a product from another country?
If 1 AUD = 0.71 USD, a $2000 USD computer will cost 2000 / 0.71 = 2800 AUD.
What is appreciation and depreciation of a currency?
Appreciation: Increase in the value of AUD.
Depreciation: Decrease in the value of AUD.
What causes an appreciation of the AUD?
Increased demand for exports.
Increased foreign investment.
Increased income receipts from overseas.
Decreased supply of AUD through reduced imports.
What causes a depreciation of the AUD?
Decreased demand for exports.
Decreased foreign investment.
Increased demand for imports.
Increased supply of AUD through more overseas investment
What are some factors leading to AUD depreciation?
Global economic conditions (e.g., reduced demand for exports).
Falling commodity prices.
Inflation rate differences.
Interest rate differentials and decreased foreign investment.
What are the positive effects of a depreciation of the AUD?
Increased export income.
Higher demand for import-competing domestic goods.
Lower import spending.
Growth in travel and education industries.
What are the positive effects of an appreciation of the AUD?
Increased purchasing power for consumers.
Lower costs for importers.
Cheaper foreign debt servicing.
What are the negative effects of a depreciation of the AUD?
Reduced purchasing power for consumers.
Increased cost of capital imports and foreign debt servicing.
Potential inflationary pressures.
What is the J curve effect in exchange rates?
In the short term, a depreciation of the AUD may worsen the current account deficit before improving it due to inelastic demand for exports and imports.
How does the exchange rate affect the balance of payments?
An appreciation makes imports cheaper, decreasing the current account balance.
A depreciation makes exports cheaper, improving the current account balance.
Changes in currency value impact financial and income flows.
What are the negative effects of an appreciation of the AUD?
Reduced competitiveness of exports.
Decreased income for export-dependent industries.
Negative impact on tourism and education services.
