Exchange Rates PPT4 Flashcards
(18 cards)
What is the Balance of Payments (BoP)?
The balance of payments is an accoutnig record fo all economic transactions between residents od Australia and residnets of the word. Residents=goverment, individuals, businesses
How is the exchange rate linked to the BoP?
Transactions in the BoP require currency exchange, and therefore directly influence the demand and supply of the Australian dollar (AUD).
What determines the demand for AUD in the foreign exchange market?
Demand is driven by exports, income receipts, and foreign investment into Australia.
What determines the supply of AUD in the foreign exchange market?
Supply is driven by imports, income payments, and Australian investment abroad.
What happens to the AUD when Australia’s trade balance or capital inflow increases?
The AUD appreciates due to higher demand.
What causes the AUD to depreciate?
Increases in imports or Australian investment overseas, which increase the supply of AUD.
What type of exchange rate system does Australia have?
A freely floating exchange rate system based on supply and demand.
How does a floating exchange rate help the BoP?
It allows for automatic adjustments, helping to stabilize the trade balance and current account.
What happens to the AUD if a negative economic shock (e.g., recession in China) reduces Australian exports?
The AUD depreciates as demand for AUD falls.
How does a depreciating AUD affect imports and exports?
Imports become more expensive, exports become cheaper for foreigners.
What is the eventual effect of a depreciating AUD on the trade balance?
After a lag, export demand rises, import demand falls, and the trade balance improves.
What happens when China’s economy grows and demands more Australian commodities?
Export prices rise, net exports and real GDP increase, and the AUD appreciates.
How can a strong AUD affect domestic inflation and production?
It reduces inflation due to cheaper imports but can lower export competitiveness and domestic production.
How does export elasticity affect the trade balance during depreciation?
If exports are inelastic, lower prices may not increase revenue and the trade balance might not improve short-term.
What happens in the long run regarding elasticity and exchange rate changes?
Goods and services become more elastic over time, leading to expected increases in trade volumes (see J-curve effect).
How does a free exchange rate help with negative shocks (e.g., post-mining boom)?
The AUD depreciates, making exports cheaper and boosting demand, leading to economic recovery.
How does a free exchange rate respond to positive shocks (e.g., mining boom)?
The AUD appreciates, raising import affordability and moderating inflation, while reducing non-mining export competitiveness.
What are the broader effects of a strong AUD during a boom?
Increases in consumption, national income, and living standards, but potential slowdown in non-mining sectors due to lower export competitiveness.
