impacts of change on exchange rates (1 Viewer)

[Go the gunners!]

Hey, i just needed a bit of help with this question

'Analyse the impact of a change in the value of the Australian dollar on the economy'

Just not sure about the structure and how to write without making it too long or rambling a bit

thanks xx

 

[sk8ie_boi]

I would write in the following format:
1. Why does the Aust. dollar appreicate and why does it depreciate (how does it relate to domestic and foreign interest rate). Also mention what it means by appreicate and depreciate.
2. The effect of appreication and depreciation. The direct effects ==> think more on the short-run.
3. How it'll affect the economy as a whole. The more long term effects. Now you can talk about growth and CAD

 

[kokodamonkey]

Talk about how it impacts on the economic issues...
economic growth, external stability,inflation,distribution of income etc etc.....

AUD depreciates , imported inflation ^^ = inflation ^^ = tightening of monetary policy..... Aud Appreciates, exports more expensive, so we sell less, imports cheaper, we buy more, the CAD worsens... etc etc

 

[sk8ie_boi]

AUD depreciates , imported inflation ^^ = inflation ^^ = tightening of monetary policy..... Aud Appreciates, exports more expensive, so we sell less, imports cheaper, we buy more, the CAD worsens... etc etc

This will only happen in the short-run, and also reduce CAD, but eventually in the long run: The depreciation of the AU$ will make Australia less competitive in the world economy. Therefore, putting into a economy downturn. Also, think about capital inflow and maybe foreign direct investment.

 

[Robbeh]

AUD depreciates , imported inflation ^^ = inflation ^^ = tightening of monetary policy..... Aud Appreciates, exports more expensive, so we sell less, imports cheaper, we buy more, the CAD worsens... etc etc

As the Australian Dollar depreciates - ie. the Australian dollar is worth less relative to the American dollar

• Australian export industries will benefit as E.R. makes their goods more competative internationally
• Australian consumers has less capacity to purchase foreign imports as their purchasing power is decreased
• therefore terms of trade worsens
• employment will generally rise as $A depreciates
• In terms of external stability, investors will be disinclined to invest in Australia as well as a less favourable stance international
• in addition, because every dollar is worth less, our borrowings (CAD) will kark it.

guys - why does inflation go up as AUD depreciates?
is it essentially because import prices are going up therefore we are forced to spend more?
therefore due to decreasing import prices, this will lead to a decrease in inflationary pressure

or is it vis versa --- causation of inflation leads to ER depreciation?
as our inflation is greater than the rest of the worlds, our competitiveness decreases... therefore increase demand for imports and decrease demand for exports causes a weaker AUD

 

[kokodamonkey]

guys - why does inflation go up as AUD depreciates?
is it essentially because import prices are going up therefore we are forced to spend more?
therefore due to decreasing import prices, this will lead to a decrease in inflationary pressure

a lot of things are imported. THerefore as the AUD depreciates relative to other currencys, imports cost more, therefore increasing Import Inflation which can also be linked to cost push inflation. Thus increasing inflationary pressures and eventually leading to tightening of monetary policy.

or is it vis versa --- causation of inflation leads to ER depreciation?
as our inflation is greater than the rest of the worlds, our competitiveness decreases... therefore increase demand for imports and decrease demand for exports causes a weaker AUD

Well it works in 2different ways, Long term - Continued high inflation will lead to AUD Depreciation due to a fall in foreign investor confidence and may even lead to capital flight.
Short term - Short term "high" inflation will lead to the tightening of monetary policy (which will result in increased Interest rates) and due to the Interest Rate Differential (Australian interest rates higher compared to international ones), Foreign Investors are enticed to invest in Australia due to the higher ROI, therefore leading to an appreciation in the AUD due to the increased demand for AUD.

correct me if im wrong?

 

[ilovecommunism]

回复: impacts of change on exchange rates

On import and export, this should refer to the "J-curve Effect", a depreciation means, in the short term, a deterioration in terms of trade can occur, worsening the CAD as imports become more expensive (money flowing out). In the long term, exports become cheaper, increase international competiveness. Nothing new about this, just saying that again... lol...

Another thing about "why inflation goes up can lead to depreciation" is that foreign investors might feel insecure of the AUS economy (note that one of the criteria that an investor might use to make its decision is "inflation rate"), therefore, less demand for the AUSD. Meanwhile, investors of direct investment might think that their cost of producing outputs would increase due to, probably, "wage-price spiral"; especially in country like AUS or the US, where union power is still quite strong. Thus, less investment.

For the CAD, depreciation means more money will be converted to chase the corresponding amount of foreign money. Increase money outflow, increase the CAD.

 

[Go the gunners!]

Re: 回复: impacts of change on exchange rates

Thanks so much guys... your info helped a lot. If you want a read of my final essay then its in the BOS resources