I'm not sure if I'm having a mental blank or really just do not know this. Does a fall in inflation lead to increased demand for the $A? My thinking is that it does as a fall in inflation leads to reduced export prices? Is that right? :S
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A fall in inflation--> higher demand $A? (1 Viewer)
- Thread starter itgrl26
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I think that a lower inflation rate would mean greater ineternational competetivessness (as our goods appear cheaper overseas) and hence more foreign demand for our exports (and hence more demand for $A). Yes you are right.itgrl26 said:
and foreign investors might be more willing to invest into aus as they think that the economy of the country is stable, and they would consider the country has a safe environment for investment, thus they would start investing into aus and increase demand for our dollar......
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another way of rationalising it is that if inflation falls real interest rates will rise (interest rates - inflation rate). That will mean Australian loans are more attractive to overseas investors. And because they will have to change their money in to $A, it will cause an increase in demand
Conspirocy
Member
or you could use purchasing power parity
so the nominal exchange rate E should equal P (the domestic price level) over the foreign price level P*
We get this by stating that P domestic = E x P* foreign
then we re-arrange
note E is $A/$US and represents the nominal exchange rate
*** important - note that when E=$A/$US then a rise in E is an appreciation and a fall in E is a depreciation
if you took the log of this equation E=P/P*
lowercase is in terms of logs
e = p - p*
holding p* fixed
if you lower p
e has to fall to keep up with it and that represents a depreciation of the australian dollar
so the nominal exchange rate E should equal P (the domestic price level) over the foreign price level P*
We get this by stating that P domestic = E x P* foreign
then we re-arrange
note E is $A/$US and represents the nominal exchange rate
*** important - note that when E=$A/$US then a rise in E is an appreciation and a fall in E is a depreciation
if you took the log of this equation E=P/P*
lowercase is in terms of logs
e = p - p*
holding p* fixed
if you lower p
e has to fall to keep up with it and that represents a depreciation of the australian dollar