Question

An assessment of the economic impact of COVID 19 on the Australian economy – an International Macroeconomic perspective. Exchange rate determination in the short run and the long run - What can theory tell us about current and likely future changes in the value of AUD.

Answer 1

The Corona Virus Pandemic, has caused serious concerns among economists who believe it to be the core reason for a recession which the world economy has never witnessed before.

The economic crisis resulting from the pandemic is not due to a system failure in the economy but rather something which has been beyond the forces of the market itself and therefore correction would take significant time as well as effort by all governments across all countries.

The country of Australia earns primarily through industries such as Tourism, Banking, Finance, Education, Healthcare, Manufacturing etc. All of these industries are worst hit due to the crisis. With only essential services allowed, people fear for their lives and do not travel. The risk of default is rising as business owners continue to make losses and it is correctly estimated that the gross domestic product growth rate of the country could even be in negative indicating a major loss in the country.

To revive the economy, the government would significantly reduce the interest rates as well as the taxes which they charge from people to help revive the economy.

Effects on Currency: -

The value of the currency, is directly determined by the forces of demand and supply. As the industries listed above decline in terms of the aggregate demand for them declines which also negatively effects the exchange rate.

The country would see a big devaluation of currency in the short run. The value compared to other currencies would reduce significantly in the short run as people would no longer desire the Australian Dollar and the US Dollar comparison would reflect this change.

Short Run Variables however are different from Long Run ones. In the long run, the Australian Government would do everything possible once the lock down situation ends to bring stability in the prices of the currency and it would yield better results for the market at large.

Conclusion: -

We can thus say, that the aggregate demand for goods and services would reduce throughout the Australian economy and result in decline in supply and gross domestic output as well.

It is expected that the value of the currency would fall rapidly in the short run, but due to intervention of the government to increase the forces of demand and supply, it would be able to return back to a normal state.

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