Help with Multiple Choice Question (Topic 2) (1 Viewer)

[luo_ge]

Could someone please explain how they would answer this?

 

[BenHowe]

Hey,

With these questions you just need to think x->y->z etc. The RBA can influence the general level of interest rates within the domestic economy through altering the cash rate and also trading foreign currency or otherwise know as 'dirtying the float'. So since the price of AUD has fallen, this can be caused by an increase in supply and/or decrease in demand. Remember for forex graphs that supply represents all those who are able and willing to sell their domestic currency (supply of AUD) and demand represents all those who are willing and able to buy the domestic currency (demand for AUD). So for the AUD to have depreciated the supply needs to decrease, which is caused by the RBA lowering the cash rate. Think about it, if the RBA lowers the cash rate -> decreased general level of interest rates, this means that domestic households generally have a greater disposable income as the repayments on loans i.e. home loans, are decreased. However due to the structural factors affecting the Aus economy such as a narrow export base and specialisation, the majority of luxury goods or elaborately transformed manufactures (ETM's) are imports. This results in an increased number of imports and thus greater outflows of AUD and thus increase supply of AUD. This accounts for the depreciation of the AUD. So at this stage the answer is either B or D. But since they currency has devalued the final answer is D as when the RBA buys USD they will increase S of AUD on forex.

But yeah I'd recommend going back and reading through your textbook because you've asked a few things about exchange rates
Sorry for the long-winded response. Hope this helps.

 

[GeorgeYLin]

I got the same answer as you Ben, but my reasoning was a little bit different

DEMAND FOR AUD DECREASED: This was due to lower interest rates which makes it less profitable for foreigners to invest in Aus.
SUPPLY OF AUD INCREASED: This was due to the RBA selling AUD (buying USD)

Thus D

 

[BenHowe]

I got the same answer as you Ben, but my reasoning was a little bit different

DEMAND FOR AUD DECREASED: This was due to lower interest rates which makes it less profitable for foreigners to invest in Aus.
SUPPLY OF AUD INCREASED: This was due to the RBA selling AUD (buying USD)

Thus D

Yeah I always forget about your reason for demand -_-

 

[BenHowe]

Btw hectic marks

 

[GeorgeYLin]

Haha thank you Ben