Part A — Determination, movements and effects of the $A
This worksheet builds the exchange-rate skills the exam rewards: using the demand and supply model to explain movements, performing simple currency conversions, and analysing the effects of appreciation and depreciation.
Concepts
1. Define an exchange rate and explain what is meant by an appreciation and a depreciation of the $A.
2. List two sources of demand for the $A and two sources of supply of the $A on the foreign exchange market.
Using the model
3. Draw a demand and supply diagram for the $A. On it, show the effect of a large increase in foreign investment into Australia. Label the curve shift and the movement from the old to the new equilibrium, and state whether the $A appreciates or depreciates.
4. For each event, state which curve shifts, in which direction, and the effect on the $A:
(a) A sharp fall in iron ore prices.
(b) The RBA raises the cash rate well above overseas rates.
(c) A jump in Australians travelling overseas.
Calculation and effects
5. If A$1 = US$0.65, how much in US dollars is an export invoice of A$40,000 worth? If the $A then appreciates to US$0.72, recalculate, and explain what this does to the price faced by the American buyer.
6. Analyse the effects of a sustained depreciation of the $A on (a) exporters, (b) consumers buying imported goods, and (c) inflation.