Question

consider a recessionary australian economy. Explain how forex swaps and repos can be used to achieve the same target cash rate

Answer 1

RECESSION- Recession is phase in the economy where AD<AS in the economy as a result the producers are discouraged for production and thus production declines in the economy as a result unemployment increases in the economy and seller have to decline the prices of goods and services in the economy to generate revenue.

recession in Australian economy-

Australia reported to enter in recession in the starting of the month of June. 2020 recession may leads to some serious and critical economic challenges

1. low level of demand
2. unemployment
3. lack of investment opportunity
4. excess burden over government
5. fiscal deficit

IMPORTANCE OF REPO RATE-

1. repo rate can be an effective tool used by the central bank of the country for the maintenance of equilibrium level in the economy.
2. central bank may lead to decrease the REPO rate as a result loans would be available at a cheaper rate in the economy and producer would be encouraged to make investment and to continue the production process as a result there would be an increase in employment level in the economy.thus there would be an increase in the level of income and thus the consumption of the people.
3. decrease in the REPO rate may leads to increase in the money supply in the economy.

FOREX SWAP-

it is a term which is concerned with the spot and forward market and currency can be purchased and sold at the same time.

during the recession period there would be decrease in exports due to low level; of production and thus the value of domestic currency would decline, if a country is having development potential and scope of growth then it might be an interesting place place for investment because the investment would be cheaper at earlier time. thus the forex swap would increase the demand for the domestic currency as a result the equilibrium point can be restored to earlier level.

but if there is chances that economy may face a worse situation say 'depression' then the situation would be contrary.the existing foreign investor would reduce the investment and look for other countries to invest. therefore there are both chances of occurrence which can't be denied.