Question

4.1 According to the article by Karen Maley, if Australian interest rates are raised, this is likely to push the Australian dollar higher. A likely explanation for this is:

A.  Capital inflows fall and capital outflows rise, implying the demand for the AUD increases and supply of the AUD increases
B.  Capital inflows fall and capital outflows rise, implying the demand for the AUD increases and supply of the AUD decreases
C.  Capital inflows rise and capital outflows fall, implying the demand for the AUD increases and supply of the AUD decreases
D.  Capital inflows rise and capital outflows rise, implying the demand for the AUD increases and supply of the AUD increases

4.6 Suppose that Australian returns on investment fall relative to world returns. What do you expect is most likely to happen in the market for the AUD?

A.  Only demand would shift to the right

B.  Only demand would shift to the left

C.  Only supply would shift to the right

D.  Only supply would shift to the left

E.  Both demand and supply would shift to the right

F.  Both demand and supply would shift to the left

G.  Demand would shift right and supply would shift left

H.  Demand would shift left and supply would shift right

4.7 At present, China is experiencing falling GDP and rising debt levels. How would you expect the Australian dollar to be affected?

A.  It would depreciate

B.  It would appreciate

C.  It would be unaffected

Answer 1

4.1 Answer : (c) Capital inflows rise and capital outflows fall, implying the demand for the AUD increases and the supply of AUD decreases.

When the interest rates are high, it implies higher returns on investment, which is a positive sign for firms and investments to invest in Australia. Hence the capital inflows rise and less capital outflow occurs. Hence the demand for AUD increases as more people want to invest in AUD. Since the demand increases, the supply decreases.

4.6. Answer : (H) Demand would shift left and Supply would shift right

When there is less returns on investment, the capital inflows decreases and potential investors go out of the country seeking better returns. Hence there will be less demand for the AUD and similarly, the supply of AUD increases in the market. Thus in the Demand-Supply curve, demand will move to the left and supply would move to right.

4.7. Answer : (A) It would depreciate.

China is Australia's biggest trading partner in a variety of segments. Particularly after 2014, when Australia and China entered into a free trade agreement, there is a lot of cooperation happening between them. While China, the second largest economy is facing a slow down and a rise in debt, a change in stance is happening as China being a great manufacturing country to being a consumption friendly country.

The Australian exporting sector exports consumption goods and minerals such as iron ores in large quantity to China. It will all be affected and also, every year, Chinese travelers are the large in number to visit Australia. Since as the slow down is continuing, less travelers will visit Australia and their tourism sector will also face a hit.