The Australian Dollar and the Exchange Rates Assignment
Added on 2021-05-31
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Running Head: THE AUSTRALIAN DOLLAR AND THE EXCHANGE RATESTHE AUSTRALIAN DOLLAR AND THE EXCHANGE RATESName of the studentInstructorInstitutionCourseDate
THE AUSTRALIAN DOLLAR AND THE EXCHANGE RATES2Factors that affect movements in the Australian Dollar include;QUESTION 1AFarming; this is because close to 12% of the value of the AUD comes from farming activities and the related agricultural processes. If any unfortunate events such as drought or restriction that prevents the export of these agricultural products occur, then the AUD will be affected.Reserve bank policies; the AUD is quite popular for the bilateral trade between Australia and Japanese Yen, for which an interest rate of close to 4% spreads between these two countries. The Australian bank reserve policies will determine the direction of the interest rate and the profitability of the AUD as far as investment is concerned.[CITATION Blu15 \l 1033 ]Mining; the price of the Australian dollar is largely impacted by resources such as oil, gold and coal. This means that depletion of such resources or putting a restriction to their exploitation and also a fall in demand of these resources in the export markets will have an impact on the performance of the AUD.QUESTION 1BThis movement affects the profitability of Australian businesses in several ways depending on whether it is a depreciation or appreciation;When AUD appreciates, the profits from imports would increase because it makes the imports cheap and hence their demands increases. On the other hand, appreciation decreases the profits from exports because it makes the exports to be expensive and hence reduces their demands abroad
THE AUSTRALIAN DOLLAR AND THE EXCHANGE RATES3When the AUD depreciates, profitability from the imports decreases because it makes theimports to be expensive thus a reduction in demand. Consequently, it increases profitability fromthe exports because it makes the exports cheap and thus increases their demand.QUESTION 1CForeign exchange hedging is a type of a transaction that is carried out by a forex businesspeople or investors to protect their businesses from foreign exchange risks that arises from transactions in foreign currencies. Hedging would assist Australian businesses to diversify globally and take advantage of these global markets without having to incur the risks of currencylosses. [ CITATION Das13 \l 1033 ]. https://www.rba.gov.au/publications/bulletin/2017/dec/8.html.Question 2aRoles of Interest Rates in the EconomyAn increase in the interest rates encourages saving and this leaves them with less disposable income, thereby decreasing the price levels. In contrast, a decrease in the interest ratesencourages borrowing and this leaves consumers with more disposable incomes which increases the price levels.Price levels are measured using the consumer price index(CPI). It measures the percentage change in the price of basket of goods and services purchased by households.
THE AUSTRALIAN DOLLAR AND THE EXCHANGE RATES4Interest rates plays a role in the economic growth in that raising it increases the cost of borrowing, which in turns reduces the disposable income and hence limiting consumer expenditures which in turn thwarts economic growth[ CITATION Joh14 \l 1033 ].The GDP is the measure of economic growth. It is arrived at by summing the total value of goods and services produced within the country.Interest rates can also control unemployment in that lower interest rates would encourage borrowing which would leave the consumers with higher disposable incomes, this increases theirexpenditure on goods and services and increases demand. It also enables them invest in the economy thereby creation of jobs through these investments and high demands.Unemployment rate is the proportion of the labor force that is unemployed. To get to this statistic we need to calculate the total number of people who are unemployed, we then take this total as a percentage of the total labor force. Labor force is the total individuals over the age of 15 who are eligible to work, and it includes those in employment and those unemployed..[CITATION Joh14 \l 1033 ].Question 2bExpansionary and Contractionary Monetary PoliciesExpansionary monetary policies lead to a decrease in the interest rates. to increase moneysupply in the economy, the interest rates are lowered so as to encourage borrowing and stimulate economic growth through high expenditures in the economy.
THE AUSTRALIAN DOLLAR AND THE EXCHANGE RATES5Contractionary monetary policies decrease the interest rates. This is because it is aimed at slowing down inflation rates and therefore there is a need to discourage borrowing.[CITATION Bla17 \l 1033 ] .Question 2c[ CITATION Das13 \l 1033 ].Expansionary policyprice levelunemploymentAggregatedemandEconomic growthConsumerspendingBusiness profitabilityincreasesDecreases Increases Increases increasesIncreasesReason Increase in demand over supply High demand leads to investment and creation of employmentDue to increase in disposable incomeDue to increased expenditure in the economyDue to increase in disposable incomeStimulated demand leads to high salesContractionary policydecreasesincreasesdecreasesdecreasesdecreasesDecreasesReason Due to decrease Due to low demand and Due to a decrease Due to a decrease inDue to thereduction Due to low demand
THE AUSTRALIAN DOLLAR AND THE EXCHANGE RATES6in moneysupply and hence low demand low investment activitiesin disposable incomepublic expenditure in the economyin disposable incomethus low volume of sales[CITATION Bli15 \l 1033 ].Question 3Fiscal PolicyThe purpose of the stimulus package was to increase spending in the economy so as to pull the country out of the recession and prevent economic slowdown. It is intended to keep the economy afloat by creating jobs and increasing aggregate demand in the economy. This expenditure by the government has a multiplier effect in the economy in that for every dollar spent, bigger percentage of it is expected to be generated out of the activities on which it was spent. The fiscal policy is based on the Keynesian theory of expansionary and contractionary fiscal policies.[CITATION Bli15 \l 1033 ]. spend $379 spend $506
THE AUSTRALIAN DOLLAR AND THE EXCHANGE RATES7 spend $675 save $127$900 save $169 Save $225For example, in the above diagram, from an initial amount of $900, a total of $1379 has been spent in the economy and this boosts economic growthQuestion 4Reliability of Unemployment MeasuresThe unemployment rate measures are not reliable because its sole focus is on the unemployed only. It doesn’t take into account those who are marginally attached to the work force and also the discouraged workers (those who are not actively seeking for employment in the period the survey was conducted). It also doesn’t differentiate between part time workers andfull time workers. As we know, the part time workers falls under the underemployed and not fully employed .[CITATION Fle04 \l 1033 ].Question 5Goods and Services TaxSome of the impacts of 5% increase in the GST on consumers and businessesThe Australian government has proposed an increase of goods and services tax from 10% to 15%. overall, this would negatively impact the economy in the following ways
THE AUSTRALIAN DOLLAR AND THE EXCHANGE RATES8There would be a reduction in the consumers spending ability as the increase in prices of these commodities would discourage spending. Non-essential goods and luxuries would suffer most asconsumers will greatly check their expenditures on these goods.The costs of production would increase and this would prompt necessary measures by businessesto counter this. Most likely, they would do this by laying off workers and this would lead to an increase in the number of those unemployed.Economic growth would be affected because of the decline in demand of goods and services. Investments would also decline because the lack of demand. This might force businesses to closedown because it is very unprofitable to do transact in an economy that is doing badly.[CITATION Nay16 \l 1033 ].MetricIts meaningWhat it showsWhat it doesn’t showInterest ratesIt is the rate charged by banks on money borrowedLow rates shows increased expenditures while high rates shows reduced expendituresFlow of money in the economyInflation rateIt is the percentage change of a price index over timeRates of increase in prices of commoditiesPrice increase in specific commoditiesGDPMonetary Rate of The national debt
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