multiple choice Q (1 Viewer)

[ToO LaZy ^*]

high domestic inflation rates will make imports cheaper and increase the demand for australian dollars.
trus or false?

EDIT: and an explanation plz

 

[kochou]

false...... it will make imports relatively cheaper...but high inflation rates won't increase demand for $Au since exports will be very expensive

 

[ToO LaZy ^*]

mmm..this is what i'm thinking..when there is high rates of inflation, this adds to the cost of production, hence our exports will be more expensive (what you said). but inflation also pushes the $A up, therefore, wouldn't that increase the demand of $A for foreigners due to investment/speculative reasons?

 

[Rorix]

an increased demand for AUD will happen only if our exports are priced in AUD and are price inelastic - the price of the export will increase so if total outlay also increases, there will be more demand for AUD to pay for the exports, but most of our exports are price elastic anyway (and priced in USD)

Also, this completely ignores the reduction in the real interest rate with increased inflation, and the increased purchase of imports as they become cheaper relative to domestic goods.

So basically, false.

(as a response to the inflation rise monetary policy may be tightened which would increase investment and so on, but such effects are beyond the scope of the question - it's talking about right now).

 

[Zarathustra]

...just look at Uruguay...

 

[ToO LaZy ^*]

uruguay?..
ok sweet..thx peeps

 

[aditya]

wat do u mean they're priced in USdollars? so everytime someone buys soemting from us, they pay in USD???? and then the farmers exchange USD for AUD?

this seems incorrect to me

and i thought the AUD would go down, following interest rates, the demand to invest in australia would go down????

 

[Rorix]

Yes.

If it seems incorrect to you, it's because you're wrong

The markets for primary commodities etc. are almost all in terms of USD.

 

[Zarathustra]

In Uruguay high inflation didn't lead to foreign demand for the dollar - I'm just thinking of current examples...

 

[ToO LaZy ^*]

In Uruguay high inflation didn't lead to foreign demand for the dollar - I'm just thinking of current examples...

OOoooh...ok..woops..