1090468950_2004_Economics_Assessment_Task_minnie_minh - Tue...

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Tue Minh Lac Economic extended response Economic- Extended Response  15.03.04 Question:  Explain why and how the RBA may intervene in the FOREX to affect the  Exchange rate.  The value of the Australian exchange rate (ER) is normally determined by allowing  the ER to float cleanly – through allowing market forces to determine the ER. However there  may be circumstance in which the central bank of Australia- Reserve Bank of Australia- RBA  may intervene in the FOREX market and hence influencing the ER in one of two ways:  encouraging an appreciation of the ER (fig. 1.1) or encouraging a depreciation in the ER (fig  1.2).  There are many reasons to why the RBA may intervene within the FOREX market, these  reasons are: if the exchange rate diverges from its long running equilibrium as suggested by  the fundamentals in the economy, a serious misalignment of the ER with the other currencies  may have adverse effects on macroeconomic variables such as inflation, employment and the  Cross Domestic Product (GDP). Another cause to why the RBA may intervene with in the 
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This note was uploaded on 08/19/2009 for the course ECON 1001 taught by Professor - during the Three '07 term at University of Sydney.

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1090468950_2004_Economics_Assessment_Task_minnie_minh - Tue...

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