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34 supply of australian dollars 0 quantity of a price

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34 Supply of Australian dollars 0 Quantity of $A Price of (e) S $A when: buy imports outward incomes/ transfers buy foreign assets S $A
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35 Supply of Australian dollars 0 Quantity of $A Price of (e) S $A S1 $A Shifts in S $A Domestic real GDP Domestic prices relative to foreign prices Preferences/tastes Interest rate differential
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36 Demand and supply of Australian dollars model D $A S $A 0 Quantity of $A Price of $A (e) Equilibrium exchange rate (e) What happens to the $A exchange rate if the Australian economy goes into recession and real GDP falls
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37 Demand and supply of Australian dollars model D $A S $A 0 Quantity of $A Price of $A (e) Equilibrium exchange rate (e) What happens to the $A if domestic (Australian) prices rise relative to prices overseas?
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38 Demand and supply of Australian dollars model D $A S $A 0 Quantity of $A Price of $A (e) Equilibrium exchange rate (e) What happens to the $A if the domestic (Australian) interest rate falls relative to interest rates overseas?
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The (Flexible) Exchange Rate and Monetary Policy In open economies like Australia, the exchange rate provides an additional channel by which monetary policy can influence the level of aggregate demand and GDP. If the RBA tightens monetary policy (by raising the real interest rates), this will increase demand for the dollar and produce an appreciation of the exchange rate. (See the diagram in previous slide). Supply curve may also shift (inwards) as Australians buy less foreign assets.
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40 The (Flexible) Exchange R ate and Monetary P olicy Expansionary Monetary Policy Lower real interest rate Higher I and C ALSO Depreciation of exchange rate Higher exports ( X ) and lower imports ( M ) Contractionary Monetary Policy Higher real interest rate Lower I and C ALSO Appreciation of exchange rate Lower exports ( X ) and higher imports ( M )
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41 3. Fixed exchange rates Flexible Fixed Price of $A (e) Price of $A (e) 0 0 Quantity of $A Quantity of $A S $A D $A D $A S $A Exchange rate can be ‘fixed’ above or below the equilibrium ‘e’ e e’ e’’
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42 Fixed exchange rates . D $A S $A 0 Quantity of $A Price of $A (e) Equilibrium exchange rate(e) Fixed ‘e’ Fixed ‘e’ Overvalued Undervalued
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43 Fixing the nominal exchange rate Direct regulation of foreign exchange transactions through foreign exchange controls rations the available supply of foreign exchange to approved buyers of foreign exchange Central Bank buys foreign exchange/sells $A or sells foreign exchange/buys $A => a stock of international reserves (ie foreign currency assets) is required to maintain an overvalued exchange rate => Risk of speculative attacks on currency (ie - massive selling of domestic currency assets by both domestic and foreign investors)
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44 Fixed exchange rates .
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