Macroeconomics and Currency Exchange

The assignment analyzes the relationship between US interest rates and the value of the Australian dollar. It discusses how a rise in US interest rates can lead to an appreciation of the US dollar and a depreciation of the Australian dollar. The assignment also delves into concepts like current account balance, capital account balance, and statistical discrepancies, using numerical examples to illustrate these concepts. It concludes by examining the impact on official reserves and the role of the US as a lender in the global economy.

Introduction to Macroeconomics

Table of Contents
QUESTION 1..................................................................................................................................5
a. Stating the value of output.......................................................................................................5
b...................................................................................................................................................5
a. Computation of labor force......................................................................................................5
b. Computation of employment...................................................................................................6
c. Calculating unemployment rate in November 2015................................................................6
Stating consumer price index.......................................................................................................6
QUESTION 2..................................................................................................................................7
a....................................................................................................................................................7
b...................................................................................................................................................8
c....................................................................................................................................................9
d...................................................................................................................................................9
e..................................................................................................................................................10
QUESTION 3................................................................................................................................10
A................................................................................................................................................10
b.................................................................................................................................................10
c. Calculating the current account balance................................................................................11
d. Calculating the capital account balance.................................................................................11
e..................................................................................................................................................12
f..................................................................................................................................................12

QUESTION 1
a. Stating the value of output
Particulars Item Price
Figures
(in $)
Food 3 million food $1 per Kg 3000000
Shirts 50000 $20 1000000
Houses 20 $50,000 2500000
Medical services 50000 hours $20 per hour 1000000
Motor car plant 1 1000000 1000000
Tanks 2 $50000 per tank 100000
Total output 8600000
b.
GDP = C + I + G +NX
Gross Private Consumption Expenditures(C)
Gross Private Investment (I)
Government Purchases (G)
Net Exports (X - M)
GDP = 30000 + 1000
= $31000
c.
From assessment, it has been identified that Mr Asaud is correct to a great extent.
Recession is the part of business cycle which goes out after the specified time frame. Hence,
business cycle provides deeper insight about the expansion and contraction of an economy. Thus,
business cycle clearly entails the downward and upward movement of GDP as well as long term
growth or success. Hence, business cycle presents that economy grows, stagnation or decline
over the time frame. It is one of the main aspects which show that in the specific quarter sales
increases, whereas in other revenue decreases to a great extent.

Jobs and Inflation
a. Computation of labor force
Given that:
 Labor force participation rate: 69.6%
 Working-age population (in thousands people): 18,429,726
 Labor force = 18,429,726 * 69.6%
= 12827089.3
b. Computation of employment
Given that
 Working-age population (in thousands people): 18,429,726
 Employment-to-population ratio: 65.2
 Employment level = 18,429,726 * 65.2%
= 12016181.35
c. Calculating unemployment rate in November 2015
Date Labor force
Unemployed
people
October 2015 3803200 200500
Nov-15 3802900 197600
Unemployment rate 5%
CPI and Inflation
Stating consumer price index
Computation of changes takes place in the prices of University education index

Item 2003 2004 Change in the
university
education price
index
Tuition and Fees1 $2500 $30
00
500 / 2500 * 100 =
20%
QUESTION 2
a.
Effect of quantity expansion of Euro on money supply
The below mentioned graph presents that if Central bank increases the money supply
then it may result into decline in interest rates.

Further, from assessment, it has been identified that consumption and economic growth
will incline when quantity of Euro expanded. Moreover, it will increase the spending level of
individuals and thereby facilitates high economic growth and development.
b.
Quantity expansion of euro money will increase the demand of euro and hence the value of euro
will also increase as the people and firms will hold more money and spend more.
The exchange rate will appreciate as there is an increase in the demand of euro currency
as compared to other currency. The interest rates will become more attractive as more people
will tend to deposit money in the banks in order to get more returns.
The exports will increase as the production will be increased so as to export the goods to
other countries. Exports will increase the exchange rate of domestic currency.

The current account balance will show a surplus as value of exports will be more than
imports if there is no government intervention. These things will improve the competitiveness as
the production will increase because of the money supply.
c.
Because of the increase in the interest rate in US, it provides higher rates to the lenders-of
Australia and hence this will attract more of foreign capital which will then show a rise in the
exchange rates in the short run.
d.
The above mentioned graph presents rising household prices, the demand for the houses
has slowed down and the people residing is Australia are forced to staying in rental houses. As
there is a rise in the interest rates then the house prices will also rise and people can't afford to
pay such a high price. Household debt burden with respect to interest rate has increased as the
disposable income of the people is the same and when interest rates increases they have to pay
more which increases their burden.

e.
A rise in US interest rate will show a appreciation in the US currency will will in turn
devalue the Australian currency as compared to US dollar. A rise in the interest rate of US will
force the Australian's to export the goods. And fall in the interest rates will help in importing the
goods.
QUESTION 3
A.
1) The demand curve will move towards the right and the supply curve will move towards the
left hence the equilibrium point will move upwards. The overseas nations will demand more of
the domestic currency.
2) Recession will cause the shift in the downward movement of the demand curve and the supply
curve will moves upward hence the equilibrium point will shift downwards.
3) A rise in the inflation rates in the domestic currency will decline as the purchasing power of
the people will reduce forcing the demand curve to shift towards left.
4) A rise in the interest rates will make it more attractive for other investors to invest in the
domestic currency. Hence the curve will shift towards the right.
5) As there is currency appreciation the people will move to other countries and the tourism of
other countries will increase, as people in domestic currency can get more amount as compared
to other currency.
b.
On the basis of cited case situation, in Australia interest rate is 2%, on the other side, in
US interest rate accounts for 3%. Hence, by considering such aspect it can be stated that due to
high interest rate consumption level decreases in US to a great extent. Hence, such aspect will
closely affect the demand of Australian products in US market. Due to this, export related

activities will be affected in a negative manner. Besides this, demand for Australian dollar will
also decline in USA. Thus, value id AUD$ will depreciate in against to US$.
c. Calculating the current account balance
Current account is one of the best indicators which provides deeper insight abut the
health of economy. Such account presents the sum of balance of trade, net income from abroad
and net current transfers.
Particulars
Figure
s (in $)
Export of goods and services 1853
Less: Import of goods and services 2561
Net balance of goods and services -708
Net interest income 121
Less: Net transfers -123
Net income flows -2
Current account balance -710
d. Calculating the capital account balance
Capital account helps in identifying the situation of deficit or surplus. In this, deficit
presents that money is flowing in foreign nations. Capital account presents the net worth of
business at specific time frame.
Particulars
Figures
(in $)
Foreign investment in US 955
U.S. investment abroad
300
Capital account balance 655
Add: Statistical discrepancies 66
Net capital account balance 721

e.
From the above mentioned evaluation, it has been identified that US official reserve
increased over the time frame.
f.
By considering the capital account it can be stated that US was lender in the concerned
year. Moreover, during the related accounting year more FDI comes in US.