Exchange Rates PPT 3 Flashcards
(21 cards)
Is having a high or low exchange rate inherently good or bad?
Neither; the impact of an exchange rate depends on the sector affected (e.g., consumers, producers, importers, exporters).
How do different sectors experience exchange rate movements differently?
Consumers, producers, importers, exporters, and domestic producers are all affected in unique ways depending on whether the currency appreciates or depreciates.
What happens to the price of Australian exports when the currency depreciates?
The price of Australian exports falls in foreign currency, making them more competitive.
What happens to the price of imports in Australia when the currency depreciates?
The price of imports rises in Australian dollars, making them more expensive.
How does currency depreciation affect domestic producers competing with imports?
It benefits them by making imports more expensive, increasing the competitiveness of domestic goods.
What impact does depreciation have on domestic tourism?
t boosts domestic tourism and encourages foreign tourists to visit Australia as it becomes cheaper.
How does depreciation impact consumers?
Consumers are harmed as they pay more for imported goods and services (e.g., petrol, cars, overseas travel).
How does depreciation affect aggregate demand and the economy overall?
It increases net exports, boosting aggregate demand, income, real GDP, and economic activity (expansionary effect).
What is the long-run effect of depreciation on exports and imports?
Exports increase and imports decrease, leading to higher net exports.
How does depreciation affect the Consumer Price Index (CPI)?
It increases CPI due to higher prices of imported goods, causing cost inflation.
What other type of inflation might rise following a depreciation?
Demand inflation may increase due to higher income and consumption.
How are businesses selling imported goods affected?
They see a decline in sales due to higher import prices (e.g., Harvey Norman selling imported fridges).
How do export-focused businesses benefit from depreciation?
They gain from increased foreign demand for their now cheaper goods and services.
What happens to input and production costs during a depreciation?
Costs increase due to more expensive imports like machinery, petrol, and freight.
What advantage do businesses competing against imports have during depreciation?
: Their competitiveness increases as imports become more expensive.
What immediate effect does depreciation have on the trade balance?
It may worsen initially as import prices rise and export demand takes time to respond.
What is the long-term effect of depreciation on the trade balance?
The trade balance improves as exports increase and import demand declines
Why does the trade balance worsen in the short term after depreciation?
Because imports become more expensive immediately while export volumes take time to grow.
What is the “J-curve” effect in economics?
It describes how a country’s trade balance worsens initially after depreciation but improves over time.
Why does the trade balance improve in the long run after depreciation?
Foreign demand for cheaper exports rises and domestic demand for imports falls.
Exchange Rate depreciation effect
prices of Aus exports to foreign buyers decrease
prices of imports rises
improvement in international competiveness
net exports will increase
real gdp increases
boost to economic activity
increase in rpoduction cost due to higher import prices
cost inflation increases
