Question

Fill in the blanks.

QUESTION 13 If the RBA surprises the market by raising its cash rate target to 3% the AUD will immediately against all other currencies. This immediate change of the AUD value is making our exports thus In Japan the interest rate is close to 0%. Therefore, the AUD is very likely to the coming year. In Indonesia the interest rate is around 6%. Therefore, the AUD is very likely to depreciate) against the Indonesian Ruphia over the coming year. (appreciate / depreciate) (cheaper /more expensive) and (fosters / dampens) economic activity and inflation. (appreciate / depreciate) against the Yen over (appreciate/

Answer 1

If the RBA surprises the market by raising its cash target to 3%, AUD will immediately appreciate against all other currencies. This immediate change of the AUD value is making our exports more expensive and thus dampens economic activity and inflation.

in JAPAN, the interest rate is close to 0%. therefore, AUD is very likely to appreciate against the yen over the coming year. In Indonesia the interest rate is around 6%. Therefore the AUD is very likely to depreciate against the Indonesian Rupiah over the coming year.

EXPLANATION TO THE ANSWERS

The basic rule that applies is that the changes in the demand and supply of a country's currency effects the change in exchange rate of it's currency. If the demand of currency rises, then the currency appreciates.

BLANK 1

If RBA hiked it's cash target (equivalent to overnight rate used by banks to lend to each other to fulfill their daily cash needs), then overall interest rates also increases. An increase in interest rates( keeping other countries' rates same), makes the domestic country attractive to foreign investments. Hence, demand for domestic currency (AUD) rises. As demand for AUD rises, the currency appreciates.

BLANK 2

Currency appreciation makes foreign goods relatively cheaper to domestic citizens and make domestic goods relatively more expensive to foreigners. Thus, exports become more expensive.

BLANK 3

An increase in imports and decrease in exports reduces the overall economic activity in the economy. The stock of goods gets piled up due to less demand and, thus inflation also is restrained. Hence, both economic activity and inflation dampens.

BLANK 4

Relatively lower interest rates in Japan, makes Australia attractive investment decision. Thus, demand for AUD rises and AUD appreciates.

BLANK 5

Relatively higher interest rates in Indonesia, makes Indonesia attractive investment decision. Thus, demand for AUD falls and AUD depreciates.

Hope it helps.

Thankyou!