Economics for Professionals

Running head: ECONOMICS FOR PROFESSIONALS
Economics for Professionals
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ECONOMICS FOR PROFESSIONALS1
Table of Contents
Question a........................................................................................................................................2
Main issues of the article.............................................................................................................2
Determination of exchange rate...................................................................................................2
Question b........................................................................................................................................4
Nominal exchange rate between USD and AUD........................................................................4
Question c........................................................................................................................................5
Driving factors behind recent movement of AUD......................................................................5
Question d........................................................................................................................................7
Effect of depreciation of AUD on Australian economy..............................................................7
Question e........................................................................................................................................8
Policies to increase value of AUD...............................................................................................8
References......................................................................................................................................10

ECONOMICS FOR PROFESSIONALS2
Question a
Main issues of the article
The article summarizes recent drop in the value of the Australian dollar with respect to
US dollar. Australian dollar has dropped below US 70 cents to the lowest point in the last ten
years. Breaking the lowest benchmark value, AUD fell to US 67.49 cents. The value though
recovered somewhat to US 68.71 cents it is still below the lowest value. Australian dollar hit
badly by the sign of weaker growth in China that of European region especially in Italy and
Spain. The slower economic growth in these nations results in a decline in export demand of
Australia. The situation further worsens by the economic downturn in Germany. The new orders
in these nations are falling with deterioration of output growth (Moore 2019). The state of global
manufacturing indicated by PMI showed a downfall reaching to the lowest level since the last
two years. The deterioration of trade flow further added to a currency depreciation. Capital
Economic stated that since the second half of 2018, manufacturing indices declined in almost all
the major countries. Not only Aussies, there is a decline in value of pound and euro. There is a
sharp drop in prices of aluminum and copper hurting the sentiment of AUD. Reserve Bank of
Australia is expected to be in a position of raising interest rate however, the bank remained less
upbeat in this direction. Economist predicts economic growth to decline to 2.7 percent in 2020
while Australian dollar is forecasted to fall below US 70 cents in the next year.
Determination of exchange rate
Australia follows a floating exchange rate system where exchange rate between two
countries are determined from the demand and supply in the foreign exchange market (Goodwin
et al. 2015). In the foreign exchange market determining AUD-USD exchange rate demand for

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USD is determined from any transaction leading to outflow USD from Australia. In Australia,
US dollar is demanded when residents and government are willing to spend in terms of US
dollar, for making payment to US residents working in Australia, to make payment for loans and
other. Demand curve of exchange rate slopes downward because of the inverse association
between demand of foreign reserve and exchange rate. Any transaction that causes an inflow of
US dollar in the Australian market adds to supply of foreign reserve. The supply of US dollar
depends on export to US, payment to Australian working in US, interest on loan given to US
residents and other. Supply curve slopes upward because of the positive relation between
exchange rate and supply of foreign reserve. Like commodity market, equilibrium in the foreign
exchange market is determined where demand matches with the supply (Uribe and Schmitt-
Grohe 2017). In the figure below, the equilibrium value of AUD-USD exchange is given as E.
Figure 1: Determination of equilibrium exchange rate