Economics for Professionals
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Added on 2021-04-21
Economics for Professionals
Added on 2021-04-21
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Running Head: ECONOMICS FOR PROFESSIONALS Economics for ProfessionalsName of the StudentName of the UniversityAuthor note
ECONOMICS FOR PROFESSIONALS 1Table of ContentsAnswer a.....................................................................................................................................2Answer b....................................................................................................................................4Answer c.....................................................................................................................................5Answer d....................................................................................................................................6Answer e.....................................................................................................................................8References................................................................................................................................10
ECONOMICS FOR PROFESSIONALS 2Answer a Figure 1: Exchange rate determination in the forex market (Source: as created by Author)The forces of demand and supply of currency determine the price of Australian dollaras against other currencies. DD curve shows the demand curve and SS curve shows thesupply curve. The equilibrium exchange rate is determined from intersection of the demandand supply curve (Weale et al. 2015). The equilibrium point is E and the correspondingexchange rate is P.Factors influencing fluctuation of exchange rate The demand supply condition in the forex market are related with macroeconomicstatus of the nation and hence causes fluctuation in the exchange rate. These factors are asfollows Trade flows
ECONOMICS FOR PROFESSIONALS 3Trade surplus defined as the excess of export over import increases the demand forAustralian dollar. This is because buyers in the overseas market demand Australian dollar topurchase the export goods more. The increased demand pulls the exchange rate up. Thisreflects a relatively weakening of currency. Opposite is the situation during a trade deficit.That is when import exceeds export then there will be excess supply of Australian dollar(Sarno 2016). The importers ill then required to supply Australian dollar in exchange of theneeded foreign currency to pay for the import. This creates a downward pressure andexchange rate appreciates. Flow of capital Capital flow is a more important determinant of exchange rate. The investors,financial institution, MNCs and rich individuals often transact more money than trade flows.The capital flow depends on the interest rate differential among countries and hence influencethe movement of exchange rate. Interest rate Any change in the exchange rate influence the value of currency and exchange rate ofAustralian dollar. A higher interest rate relative to other nations implies an increased demandfor country’s currency. This raise the relative strength of the currency. Inflation rate High inflation in the domestic market makes Australian exportable less competitiveby raising price of these goods. If this worsens current account balance, then there would bedepreciation of currency. With a small demand of export, import will become more priceattractive (Ramasamy and Abar 2015). This leads to a fall in demand for Australian dollarand increase in dollar supply.
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