Question

2.1 What are the three main sets of factors that cause the supply and demand curves in the foreign exchange market to shift?

2.2 Graph the demand for and supply of Australian dollars for euros and label each axis. Show graphically and explain the effect of an increase in interest rates in Europe by the European Central Bank (ECB) on the demand for and supply of dollars and the resulting change in the exchange rate of euros for Australian dollars. Assume that interest rates in Australia have not changed.

2.3 Use the following graph to answer these questions: (a) Briefly explain whether the dollar appreciated or depreciated against the yen. 2 (b) Which of the following events could have caused the shift in demand shown in the graph? i. Interest rates in Australia declined relative to those in other countries ii. Income rose in Japan iii. Speculators began to believe that the value of the dollar will be higher in the future.

2.4 Graph the demand for and supply of Australian dollars for euros and label each axis. Show graphically and explain the effect of an increase in Australian government budget deficits that increase Australian interest rates on the demand for and supply of dollars and the resulting change in the exchange rate of euros for Australian dollars. Why might the change in the exchange rate lead to an increase in Australia’s current account deficit?

Answer 1

2.3 is incomplete statment here not given diagrames