Question

1. EXCHANGE RATES: AUSTRALIAN DOLLAR (AUD) [16 marks]

a. With reference to both demand and supply factors, explain how the price of the Australian dollar (AUD) is determined in the foreign exchange market (FOREX). Include a relevant demand and supply diagram in your answer. [7 marks]

Think about what would happen in Australia if the AUD in 2015 strongly appreciated against major currencies.

b. Describe the likely effects an appreciation of the AUD would have on: (i) consumers travelling overseas; (ii) the consumer durables market; (iii) wheat exporters; (iv) the local tourism industry; (v) import-competing Australian firms such as manufactures. [6 marks]

c. Is there likely to be a contractionary or expansionary effect on the Australian economy from the appreciation of the AUD? Why? [3 marks]