m/c question..... quite hard (2 Viewers)

[nick1048]

The supply of Australian Dollars will decrease. We have a fixed amount of currency in our country. If foreign direct investment takes place, dollars are being exchanged by investors in order to invest in Australian industries. You can not invest US dollars in Australian industries for instance, we only trade in our own currency. Our supply of funds will decrease, the result of a raise in interest rates automatically decreases the supply of money in the market, think about DMOs and ES accounts. Therefore the imports and exports scenario is incorrect.

 

[Tommy_69]

someone agrees with me finally. i thought i was wrong.

 

[forceblade]

tommy your logic is not correct. The answer is B

B is the answer because an increase in exports would increase demand for our dollar. Exporters convert $US to $A when they make profits, thus constituting a demand for the $A. However a decrease in imports will also increase our dollar as a result of reduced supply. Think about it, importers supply the dollar to purchase foreign currency, as such a decrease in imports constitutes a decrease in supply.

C cannot be correct because an increase in interest rates will not cause supply of $A to decrease like hte diagram is depicting. Yes it will increase demand for the $A and cause an appreciation, however it will not decrease supply.

oh man Ando u are gona fail in this test.... its C

 

[jon0_o]

actually I'm not sure but I reckon its b) although c) will also appreciate the value of our dollar but b) is more correct.

c) By definition an increase in interest rates reduces the supply of currency because the RBA sells govt securities and takes reduces the cash flow. But this doesn't actually increase the demand, just reduces the supply which drives up the value of the dollar.

b) Whereas in b) increase in exports increases demand AND lower imports reduces the supply of Aussie dollars on the forex market.
Therefore I think its b) but it could b either one