Question

Which of the following will cause the Australian dollar (AUD) to depreciate against the US dollar (USD)?

A) An increase in Australian demand for US electronics.

B) A decrease in the Australian price level

C) An increase in the Australian interest rate

D) Expected appreciation of the Australian dollar against the US dollar amongst currency traders

E) An increase in US demand for Australian coal.

Answer 1

Depreciation refers to a fall in the external value of one currency against another. Rising inflation is a major cause of depreciation of a currency. An increase in the interest rate in a country results in inflation. Thus option c is the right answer to this question.

A decrease in price level results in deflation and will further result in an appreciation in the currency of the country. Thus, option b is not correct reason for the depreciation of Australian dollar.

Also, option a and d relate to the increase and decrease in the demand of tradable goods between US and Australia. A change in the demand of tradable goods has a minor impact on the overall currency exchange rate. A change in the overall demand for imports or exports will result in the change in exchange rate. Thus, currency exchange rate is a part of macro economics and demand for individual tradable goods cannot effect the excahnge rate as a whole.