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Economic for Professionals: Assignment

   

Added on  2021-04-24

13 Pages2892 Words34 Views
Running head: ECONOMIC FOR PROFESSIONALSEconomic for professionalsName of the studentName of the UniversityAuthor note

1ECONOMIC FOR PROFESSIONALSTable of ContentsAnswer a:.........................................................................................................................................2Answer b:.........................................................................................................................................4Answer c:.........................................................................................................................................6Answer d:.........................................................................................................................................8Answer e:.........................................................................................................................................8Reference:......................................................................................................................................11

2ECONOMIC FOR PROFESSIONALSAnswer a:Foreign exchange rate is the price of the domestic currency in terms of the foreigncurrency (Gabaix and Maggiori 2015). Owing to various kind of exchange rate system, forinstance, fixed and floating, it is hard to determine the actual exchange rate (Cooper 2014).However, with the rise in researches regarding foreign exchange new theories came in and one ofthem was demand and supply framework. Demand and Supply framework is one of the simplesteconomic tools that help to determine the foreign exchange rate easily. Unlike price and quantitydetermination, demand and supply framework guides the authorities to understand and predictthe exchange rate of next period (Alichi and Benes 2015). Moreover, it helps to trace variousreasons that influence the exchange rate of a country and guides the policymakers to gauge thesituation efficiently. Considering the case of Australian currency, Australian Dollar (AUD) thisreport is aimed to analyse how the exchange rate of the AUD is determined in the ForeignExchange (Forex) market. Figure 1 represents the general demand and supply framework of the Forex market,where demand of the currencies is achieved through the export demand of a country and thesupply is determined through the domestic demand of the importable (Canallero, Farhi andGourinchas 2016). Demand curve (D) is drawn depending upon the derived demand and thesupply curve (S) is drawn depending upon the aggregate demand of the importable (Gibson andThirlwall 2016). Now, it is assumed that the equilibrium occurs at point E, where the exchangerate is 80C USD for each unit of AUD. At the equilibrium point demand of the importable in thedomestic market of Australia is represented through the Q. Under this scenario, if there is rise indemand of the AUD from Q to Q1, then the demand of the foreign exchange will shift from D toD1, leading to rise in the exchange rate to81C (hypothetically) for each unit of AUD from the

3ECONOMIC FOR PROFESSIONALSAUD/USDSD1DD2QQ2QQ1E1E2EUSD 80C/1AUDUSD 81C/1AUDUSD 77C/1AUDinitial equilibrium situation. On the other hand, if there is reduction in demand of the AUD, thenit will shift the demand curve left ward to the D2 from the initial D point, leading to fall in theexchange rate 77C USD for each unit of AUD from the initial 80C USD to each unit of AUD. Figure 1: Demand and Supply model of exchange rate determinationSource: (Created by Author)Considering the above explained demand and supply framework of the Australian foreignexchange, it can be stated that it is a flexible market system, where the Forex rate is determinedthrough the equilibrium of demand and supply (Manalo, Perera and Rees 2015). Various factorsare responsible for the fluctuations of the demand and supply of the AUD. Some of them are asfollow (Fernandes 2017):Inflation rate – rise in inflation will lead to depreciation of the AUD leading to leftwardshift of the demand curve.

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