Question

Draw a chart and explain in words what is expected to happen to the New Zealand dollar demand and supply curves (USD/NZD) if there is a forecast increase in New Zealand’s national income relative to a stable growth rate in the USA. Consider the following two scenarios.

- An increase in the rate of growth in a country’s national income relative to that in the rest of the world will result in a depreciation of that currency.

- An increase in the rate of growth in a country’s national income relative to that in the rest of the world will result in an appreciation of the currency

Answer 1

If increase in national income of any country will likely to increase interest rate in that country. Increase in interest rate will appreciate the currency of that country vs. the countries with low interest rates.

Here there is a forecast that New Zealand's national income will increase relative to a stable growth rate in the USA. This will lead to increase in interest rates in New Zealand which will lead to appreciation of NZD vs. US Dollar.

Theoretical illustration	2019	2020	2021	2022	2023	2024
National Income in New Zealand	1000	1050	1100	1150	1200	1250
Growth		5.0%	4.8%	4.5%	4.3%	4.2%
National Income in US	1000	1005	1010	1015	1020	1025
Growth		0.5%	0.5%	0.5%	0.5%	0.5%
Current USD/NZD exchange rate (on the left side)	1.52	1.48	1.44	1.4	1.36	1.32
Growth		-2.6%	-2.7%	-2.8%	-2.9%	-2.9%

Above chart shows higher increase in national income of New Zealand vs. stable growth in the US will lead appreciation of NZD vs. USD which means USD/NZD rate will decrease (depreciation of US dollar)