Question

QUESTION 12 (15 minutes LO7c) Foreign Exchange 9 MARKS Show, describe and explain on separate demand and supply diagrams the impact of the following events on the NZ exchange rate: a) The rate of increase of the Chinese economy slows significantly b) The OCR is decreased; c) The number of migrants coming to NZ decreases. For each situation answer the question in context. Assume ceteris paribus. Shift one curve only. Remember to explain your reasoning. 1 mark for each show (the diagram) 1 mark for each description (effect on D/S, exchange rate) 1 mark for each explanation Note: the mark for the diagram is awarded only if the explanation is correct.

Could you please help me to answer these question with clear writing or tying! Thank you very much!

Answer 1

In each of the following graphs, Exchange rate (P) and quantity of NZ currency (Q) are measured vertically and horizontally respectively. D0 and S0 are initial demand and supply curves for NZ currency, intersecting at point A with initial exchange rate P0 and initial quantity of NZ currency Q0.

(a) Slower growth rate in China, a trading partner for New Zealand, will decrease China's import demand for NZ-made goods, lowering NZ export demand. Therefore, demand for NZ currency will fall, shifting demand curve leftward to D1, intersecting S0 at point B with lower exchange rate P1 (i.e. NZ currency depreciates) and lower quantity of NZ currency Q1.

So Po 0

(b) Fall in OCR, a form of expansionary monetary policy, will increase money supply and decrease interest rate in New Zealand. Demand for global investment in NZ will fall since global investors will get lower return (caused by lower interest rate), therefore demand for NZ currency will fall, shifting demand curve leftward to D1, intersecting S0 at point B with lower exchange rate P1 (i.e. NZ currency depreciates) and lower quantity of NZ currency Q1.

So Po 0

(c) Decrease in number of migrants in NZ will decrease aggregate demand in NZ, lowering domestic price. As domestic price (and therefore, inflation rate) in NZ decreases, domestically-made exportable goods become cheaper in domestic market, making NZ exports globally more competitive. As a result, export demand increases in NZ. Higher export demand increases the demand for NZ currency, shifting demand curve rightward to D1, intersecting S0 at point B with higher exchange rate P1 (i.e. NZ currency appreciates) and higher quantity of NZ currency Q1.