Macroeconomics of Open Economies

Running head: MACROECONOMICS OF OPEN ECONOMIES
Macroeconomics of open economies
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1MACROECONOMICS OF OPEN ECONOMIES
Table of Contents
Answer 1:........................................................................................................................................2
Answer 2:........................................................................................................................................3
Answer 3:........................................................................................................................................5
Reference:.......................................................................................................................................7

2MACROECONOMICS OF OPEN ECONOMIES
Answer 1:
According to the investment theory, if there is rise in interest rate, then the aggregate
private investment level will tend to rise (Friedman 2017). Considering the given scenario, where
US and Australia is indulged in investment, if there is expected rise in return in US deposits, then
more people from Australia will investment in the US banks. With rise in the investment flow
from Australia to US market, there will be enhanced demand scenario in front of the US dollar
and on the other hand demand of the Australian dollar will subsequently fall (Keynes 2016).
With lower demand of the Australian dollar exchange rate of the country will eventually get
depreciated. Thus if there is future expectation that interest rate paid on US deposits will
increase, then it will depreciate the Australian exchange rate.
Figure 1: Exchange rate framework
Source: (Created by Author)
Figure 1 highlights the exchange rate framework. From the above figure it can be seen
that initial equilibrium between the AUD and USD takes place at point 1, where the dollar rate
of return is R$. Now, if there is expectation regarding the rise in the dollar return from the US