Changes of Australian Exchange Rate

In: Business and Management

Submitted By muzz170
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Analyse the effects of changes in the exchange rate of the Australian dollar against other currencies on the Australian economy

The exchange rate is the rate at which a unit of domestic currency is exchanged for a given amount of a foreign currency. The exchange rate may be measured bilaterally, against another currency, usually that of a trading partner, e.g. the US, or it may be measured as the Trade Weighted Index – against a basket of currencies of Australia’s trading partners weighted according to their importance in Australia’s trade.

As Australia has a floating exchange rate, the value of the AU$ is determined by forces of demand and supply in the forex market. The exchange rate fluctuates in order to maintain equilibrium. These changes are known as appreciation and depreciation. An appreciation is when the value or purchasing power of the AU$ rises, whilst a depreciation is when it declines.

An appreciation in the AU$ will occur if the demand for the AU$ exceeds the supply. This may be due to either an increase in demand or a decrease in supply. The graph below shows that a shift to the right (increase in demand) of the demand curve has led to a rise in the $Au from $0.70 US to $0.75 US. This may be the result of a rise in world growth, leading to a rise in the demand for Aust exports.

>>graph<<

The graph below shows demand a shifting to the left, and therefore a decrease in demand. It can be seen that this has led to a rise in equilibrium from E to E1 resulting again in an appreciation in the AU$. A decrease in supply Of Aus $ * may result from a decrease in the demand from imports in Australia, caused by lower domestic economic growth, or a fall in domestic inflation, making domestic goods cheaper.

>>graph>>

Appreciation of the Australian dollar has a number of positive and negative effects on the Aust…...

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