Reserve Bank of Australia's Interest Rate and Australian Dollar

This assignment examines the effects of an increase in the Reserve Bank of Australia's (RBA) interest rate on the supply and demand for Australian dollars, and its subsequent impact on the currency's value. The analysis explains that a higher interest rate typically leads to a decrease in demand and an increase in supply of the Australian dollar as it attracts foreign investment. The provided diagram illustrates these shifts in supply and demand curves, demonstrating how an increased interest rate influences borrowing and spending behaviors. It further discusses how government and foreign direct investment contribute to maintaining supply in the market. Ultimately, the assignment concludes that an increase in the interest rate tends to increase the value of the Australian dollar, as it becomes a more attractive investment option. The analysis incorporates perspectives from manufacturers and producers to provide a comprehensive understanding of the relationship between interest rates and currency value.

Economics
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Economics 1
Suppose the Reserve Bank of Australia increases the interest rate. What happens to the
supply and demand for Australian dollars? Does the dollar appreciate or depreciate?
Explain with words and a diagram
Suppose the RBA (reserve bank of Australia) increases the interest rate then it directly creates an
impact on the supply and demand for the Australian dollars. The high-interest rate affects the
Australian dollars which include the decrease in demand and increase in supply as the value of
the currency increases (Stevens, 2013). This has been found that generally, RBA increases the
interest rate with the motive to attract the foreign investment, the rise in demand for and value of
the Australian currency. Thus the supply and demand for the Australian dollars vary because of
the increasing interest rate.
The diagram above reflects the demand and supply of the dollars with an increase in the interest
rate.
 I = reflects the interest rate
 I1 = reflects the increasing interest rate
 SS= Supply line which is shifted upwards towards the S1S1

Economics 2
 DD = demand line which is shifted down to the D1D1, Further the Q reflects the quantity
demanded and the shift in Q1 reflects that demand has been decreased.
 Point P and R are the intersecting points.
The rise in the interest rate will make the people borrow fewer amounts due to which they spend
less in the market. Thus, the demand of the Australia dollar reduces with the increase in the
interest rate by the RBA which is clearly stated with the help of the diagram above. Moreover,
the diagram also reflects that government and much other foreign direct investment contribute in
marinating the supply in the market due to which the supply of the Australian dollar tends to
increase with the increase in interest rate (Ehrenberg and Smith, 2016).
Further, the increase in the interest rate will contribute in increasing the value of the dollars
because the dollar will be invested by the customers easily. In addition, considering the views of
different manufacturer and producer who does direct investment or consider the exchange rate
can help in understanding that value of the dollar will increase.

Economics 3
References
Ehrenberg, R.G. and Smith, R.S. (2016) Modern labor economics: Theory and public policy.
New York: Routledge.
Stevens, G. (2013) The Australian Dollar: Thirty Years of Floating [Online]. Available from:
https://www.rba.gov.au/speeches/2013/sp-gov-211113.html [Accessed on 3rd February 2018]