(Solution) Economics: Assignment
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Added on 2021-04-16
(Solution) Economics: Assignment
Added on 2021-04-16
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Running head: ECONOMICS ASSIGNMENTEconomics assignmentName of the student:Name of the University:Author note
1ECONOMICS ASSIGNMENTTable of ContentsAnswer a:.........................................................................................................................................2Answer b:.........................................................................................................................................4Answer c:.........................................................................................................................................6Answer d:.........................................................................................................................................7Answer e:.........................................................................................................................................8Reference:......................................................................................................................................10
2ECONOMICS ASSIGNMENTAnswer a:Foreign exchange rate is one of the essential parts of shaping the international trade,which stands for the value of domestic currency in terms of the monetary value of the foreigncurrency (Cooper 2014). Among many supply and demand framework is the simplestmacroeconomic models that can effectively aid the economy to predict and determine theexchange rate of the domestic currency compared to the foreign currency (Corazza and Malliaris2015). It not only determines the value of foreign exchange rate of domestic currency against theforeign currency, in addition to this, it aids to determine various key factors that can affect theeconomy’s exchange rate (Gabaix and Maggiori 2015).Figure 1, showcase the foreign exchange market demand and supply outline of a nation,where the demand is perceived through the demand of export of a nation and the supply isachieved through the importable demand of the domestic market (Caballero, Farhi andGourinchas 2016). Utilising the derived demand, AUD demand curve ‘D’ has been drawn andaggregate demand of the importable has been utilised to draw the supply curve ‘S’. Now, if theinitial equilibrium occurs at E, then it can be seen that exchange rate of each unit of AUD is 80Cin terms of USD and the demand of the importable is represented through Q. Considering, a risein demand of the AUD from Q to Q1, it can be seen that there will be appreciation of the AUD.At new equilibrium E1, exchange rate of each unit of AUD is 81C in terms of USD(hypothetically). However, if there is fall in demand from Q to Q2, then the exchange rate willfall to from initial equilibrium situation, where the exchange rate is determined at 77C USD forevery unit of AUD. Through this analysis it can be seen that demand and supply framework caneasily explain the relative price of domestic currency compared to the foreign currency and inaddition it can explain the factor too that influence the exchange rate (Knittel and Pindyck 2016).
3ECONOMICS ASSIGNMENTFigure 1: Exchange rate determination of Demand and Supply modelSource: (Created by Author)According to the above mentioned analysis of AUD under the purview of supply anddemand, it can be said that there are various factors that can lead to alteration in the demand andsupply condition of the AUD, which can in turn lead to fluctuation in the exchange rate of AUD.Key factors that can alter the foreign exchange rate of AUD are as follows:Interest rate – With rise in interest rate there will be higher inflow of foreign currency inthe Australian banks, which will lead to shift in the demand curve of Australian Dollar.Rightward shift of the AUD carve will resulting in higher price of the domestic currencyin terms of USD (Ghosh et al. 2016).Inflation rate – with rise in inflation, there will be fall in demand of Australian dollar infront of the US citizens. It will lead to shift the AUD leftward and the Australiancurrency will be depreciated (Bussière et al. 2014).
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