Economics Assignment - Overvalued Australian Dollar

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Added on 2020-03-16

Economics Assignment - Overvalued Australian Dollar

Added on 2020-03-16

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Running head: ECONOMICS ASSIGNMENT Economics AssignmentName of the StudentName of the UniversityAuthor Note

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1ECONOMICS ASSIGNMENT Table of ContentsAnswer A:........................................................................................................................................2Answer B:........................................................................................................................................3Answer C:........................................................................................................................................6Answer D:........................................................................................................................................9Answer E:......................................................................................................................................10References......................................................................................................................................12

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2ECONOMICS ASSIGNMENT Answer A: The assignment takes reference of the article “Is the Australian Dollar overvalued”written by Myriam Robin, published on February 10, 2017, in Sydney Morning Herald. Thissection of the assignment discusses the main issues of concern, which has been highlighted in theconcerned article. The Australian economy is one of the most stable and eminent economies inthe global framework and therefore the value of the domestic currency and the changes in thisvalue have immense implication on both the domestic and the international economic scenario(Delatte and López-Villavicencio 2012). As per the article, the performance of the Australian dollar, in the recent period has beenimpressive according to the opinion of the Reserve Bank of Australia. However, this opinion isnot an unanimous one as one part of the speculators and economists assert that the currency hasbeen appreciating in its value in the recent times. This trend was also observed empirically withthe rise in the value of Australian dollar, when measured in terms of the domestic currencies ofAmerica, China, Japan, Britain and others (Smh.com.au, 2017). This was, however opposed by another school of thought, including the NAB currencystrategist, according to whom there has been no noticeable appreciation in the value. Insteadthere has been slight devaluation of the currency compared to the earlier periods, which actuallyhelped the economy to float when the effects of mining boom started dissipating. On the otherhand, the opinions are unanimous in case of the trends observed in the value of the Australiandollar when measured with respect to the Trade Weight Index of the country. The trend, assuggested by the article has been clearly positive, mainly because of the increase in the terms oftrade of the country (Diebold 2012).

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3ECONOMICS ASSIGNMENT The value of the Australian dollar, however, is subjected to change provided the interestrate in the USA changes when the rate of interest in the country is kept the same. Answer B: The foreign exchange market of a country as well as in the international scenario is likeany other market as per the theoretical economic framework and the equilibrium and the stabilityin this market is also determined by the demand and the supply forces. The consumers and thesuppliers in the currency market mainly are comprised of the multinational companies, theinternational banks and those speculators who invest in the risk and returns in this market(Frenkel and Johnson 2013). The demand supply model in the foreign exchange market attributes the determination ofthe value of a currency at any particular point of time, to the demand and the supply scenariospresent in the market during that time. These in turn gets determined by the economic factorslike the rate of inflation, interest rate and the regulatory policies taken by the governing authorityof the concerned country (Rios, McConnell and Brue 2013).

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