Topic 2 questions (1 Viewer)

[rsingh]

Can someone answer these questions for me - I'm stuck on them!

1. Briefly explain how the Reserve Bank could intervene in the foreign exchange market to influence the exchange rate of the $A.
2. Identify the main structural cause of the CAD.
3. Explain the impact of foreign investment on the Australian economy.
4. Explain how an increase in the CAD can impact of future Current Account outcomes.
5. Outline 2 possible causes for the change in supply of Australian dollars, and explain one effect on Australian trade of this change in exchange rates.
6. Explain 2 ways in which Australia's export base contributes to Australia's CAD problems.
7. Explain the reason for the relationship between the capital account balance and the current account balance.
8. Why might the government seek to reduce the CAD?

Sorry guys, I know there's a heap there, but I think it will benefit everyone if these questions were answered - most were from past HSC papers.

Thanks for your help!

 

[gibbo67]

basically, in a nutshell

1. RBA can intervene in the currency market by 1. dirtying the float (buying or selling currency using its reserves of gold or foreign currency), 2. imposing a fixed price on the currency and correcting the deficit/surplus created with exchanges in monetary gold or 3. imposed a pegged system, changed on a daily basis to reflect
long-term movements in currency with the daily deficit/surplus corrected with gold./currency exchange

2. nature of he economy - australia has always been dependent upon foreign nations for resources since the colonial era, large mineral deposits in WA and QLD have attracted great amounts of foreign investment (can't think of any others for the monent)

3. currency value increases, injection of funds into the economy, thus boosting economic growth and increasing structural capacity if funds are used to purchase capital goods

4. CAD means that a substantial amount of money is being remitted overseas to pay for the funds borrowed. however, money is often borrowed to pay for the interest bill, which in turn creates a larger CAD (so a vicious cycle develops)

5. changes in interest rates may attract/repel foreign investment, changes in export/import volumes, changes in short/medium term economic forecasts (would influence speculative currency traders who comprise 95% of currency transactions)

6. agarian/quarry situation (primary goods), primary goods are low value-added, are subject to major fluctuations (take the example of oil/coal/iron ore),and require less skill (thus reduced imput of human capital into economy)

7. relationship based on assumption that currency is floating and currency supply = demand - a magical equation derived by algebraically rearranging the components of currency supply and demand (which i have since forgotten)

8. government can try to budget a surplus to decrease its share foreign borrowings and not crowding out the domestic savings market, also forces savings on the economy; government could provide incentives for private sector to save (e.g. compulsory superannuation) or tax incentives to save (such as making fees and charges tax deductable and reducing tax on interest income), (also gov could force people to hold bank balances with the government treasury, but unlikely to occur), government could also print extra money to pay for debts, but not done due to the subsequent currency depreciation and mass inflation (take bolivia in the 1970's when inflation was roughly 10000% in one year)

hope that answers most of the questions in a single thread