Economics Exchange rate question HELP (1 Viewer)

[nikitasuitsrevenge]

there is a multiple choice question in the 2009 HSC paper, where there is a graph that shows an increase in supply of AUD? It gives you 4 options
I am conflicted over the two options
A) Increased demand for foreign assets by Australians
C) Decreased demand for Australian assets by foreigners?
I know the answer is A, but C) sounds right to me. If there is a decreased demand for Australian assets, wouldn't foreigners exchange the AUD and exchange it for their foreign currency. I asked the teacher, who said, that foreigners cannot affect the supply. But if they return the AUD back into the forex market in exchange for their original currency, doesn't this increase supply. If someone could give me an answer, that would be great? Does that mean Australians cannot affect the supply of foreign currency? I'm so confused.

 

[enigma_1]

Hmm I think you're overcomplicating it just a bit. When we are talking about the increased SUPPLY of AUDs, it ALWAYS refers to INCREASED Number of Australians buying foreign assets. Because Australians need to convert AUDs into foreign currency, inevitable affecting the supply of AUDs.

On the contrary, increase in DEMAND of AUDs means that foreigners are wanting to buy Australian goods or assets and hence in order to buy our exports they are required to convert their foreign currency into Australian currency. Since they require our currency, this pushes the demand up for our currency AUDs.

So just remember to associate:
Supply of AUDs--> Australians buying foreign assets or goods
Demand for AUDs--> Foreigners demanding Australian goods or assets

 

[enigma_1]

C is there just to confuse you