couple questions about exchange rates (1 Viewer)

[devils_daughta8]

i need a couple questions answered before my halfyearlies are on, so that i can study them extensivly, thankyou to anyone that can help.
How is the exchange rate set for the Australian dollar??
What is the role of the RBA in setting this rate?
What effect might a large depreciation of the dollar have on the Australian economy??

i was away for a hospitality thing and i havent learnt all these, i tried to ask my teacher but she said that i should have learnt it....thankyou again

 

[aimeelaba77]

Answer to questions on Exchange Rates

How is the exchange rate set for the Australian dollar??
What is the role of the RBA in setting this rate?

The exchange rate is set under a floating system using the market forces of supply and demand, however it is a dirty float because the RBA has the ability to intervene and influence the value of the currency by buying or selling Australian dollars on the FOREX market. This will either cause an increase or decrease in supply, thus influencing demand relative to supply. Conseqently the currency will either appreciate or depreciate as a result of this intervention.
The RBA intervenes to stabilise long run equilibrium currency values and to reduce excessive effects of speculation.

What effect might a large depreciation of the dollar have on the Australian economy??

ADVANTAGES of a depreciation:
- improvement in international competitiveness
- higher capital inflow into Australia
- can lead to structural adjustment in industry
- long term will see increased exports due to J curve effect (ie. trade balance will worsen in the short run due to price effects but will improve due to colume effects in the long run)

DISADVANTAGES of a depreciation
- cost of imports is increased and revenue form exports decreased (short run)
- deterioration in the TOT (short term)
- increased servicing costs of existing foreign debt and exacerbation of CAD
- RBA may have to intervene to encourage foreign capital investment with increased interest rates, which will slow domestic growth


I hope that helps - i have my 1/2 yearlies tommorow and typing that kinda served as a mini revision....

ps. your teacher sounds like a bit of a pri*k........