Question 1

According to the text,if USA's national income begins to grow quite rapidly while the rate of growth in Australia remains constant,then:

Accepted Answer

If USA's national income begins to grow quite rapidly, foreign funds may be attracted to USA equities as investors seek higher returns. This would lead to an increase in demand for USD, not the AUD. However, Australian businesses expanding may still be a possibility, but it is not directly related to the scenario presented in the question.

Question 2

Consider a textbook situation in which Australia and the USA are experiencing similar low rates of inflation.Then if the rate of inflation were to decrease significantly in USA,relative to the Australia,which of the following impacts would be expected to occur?

Accepted Answer

If the rate of inflation decreases significantly in the USA relative to Australia, the purchasing power of the US dollar would increase, leading to higher demand for goods and services from the USA. This would result in an increase in Australian demand for USA goods and services. The options A, C, and D are incorrect as they do not accurately reflect the expected impact of the decrease in the inflation rate in the USA.

Question 3

If the rate of growth of Australian national income decreases while the rate of growth of national incomes in most other countries remains constant,we would expect:

Accepted Answer

The answer of If the rate of growth of Australian...

Question 4

If the rate of growth of Australian national income increases while the rate of growth of national income in most other countries remains constant,we would expect:

Accepted Answer

If the rate of growth of Australian national income increases, it may lead to higher demand for imports, increasing the supply of the Australian dollar in foreign exchange markets, which can cause the Australian dollar to depreciate.

Question 5

All else being equal,a significant appreciation of the Australian dollar is likely to result in:

Accepted Answer

When the Australian dollar appreciates, Australian goods become more expensive for foreign buyers, reducing demand and potentially leading to layoffs.

Question 6

If one country is experiencing prolonged lower inflation than another country,the currency of the first country should,in general,_______ with respect to the currency of the second country.

Accepted Answer

When a country experiences lower inflation than another, its currency generally appreciates in value relative to the other country's currency. This is because lower inflation preserves the currency's purchasing power, making it more valuable compared to currencies from higher inflation countries.

Question 7

The relationship between the exchange rate and changes in the relative growth rates in national income operates through:

Accepted Answer

Changes in the relative growth rates in national income affect the demand for exports and imports. When a country's economy grows faster than that of its trading partners, its increased income boosts demand for imports, while slower relative growth might increase the competitiveness of its exports. This dynamic can influence the exchange rate by altering the balance of trade between countries.

Question 8

It may be argued that a factor that can affect the equilibrium exchange rate is changes in relative income growth between countries.If the growth in Australian national income rises substantially,while that in the USA remains stagnant,which of the following impacts would you expect to occur?

Accepted Answer

When the growth in Australian national income rises substantially while that in the USA remains stagnant, it can lead to various outcomes affecting the equilibrium exchange rate. A higher income growth in Australia compared to the USA could increase demand for imports in Australia, potentially leading to the depreciation of the AUD if the increase in import demand is significant. However, it could also attract more foreign investment into Australia, appreciating the AUD due to increased demand for Australian dollars to invest. Therefore, the relative strength of import growth and foreign investment inflows will indeed impact the equilibrium exchange rate, making all the given answers correct in explaining the potential effects on the AUD's value.

Question 9

If the Japanese yen depreciates against the Australian dollar:

Accepted Answer

When the Japanese yen depreciates against the Australian dollar, it means that more yen is needed to buy the same amount of Australian dollars. This leads to an increase in the yen price of Australian exports to Japan, making these goods more expensive for Japanese consumers.

Question 10

If Australia's national income begins to grow quite rapidly and Australia's demand for German imports grows,then there would be:

Accepted Answer

If Australia's national income is growing rapidly, it means the country has higher purchasing power, which will result in increased demand for imports from other countries like Germany. This will lead to an increase in the supply of AUD as Australians would need to exchange more of their currency to buy foreign goods.

Question 11

A change in the Australian dollar value of the British pound from $2.60 to $2.80 means:

Accepted Answer

A change from $2.60 to $2.80 means that it now takes more Australian dollars to buy one British pound. This indicates that the Australian dollar has become relatively weaker or depreciated compared to the pound. Therefore, the correct choice is C.

Question 12

According to the text,if Australia's national income begins to grow quite rapidly while the rate of growth in USA remains constant,then:

Accepted Answer

If Australia's national income begins to grow quite rapidly while the rate of growth in the USA remains constant, it will lead to increased growth prospects for Australian businesses, which could result in expansion. This could attract foreign funds to Australian equities, and there could be an increase in demand for the AUD. Therefore, all of the given answers are correct.

Question 13

If the inflation rate in Australia is higher than that of Italy,and productivity is growing at a slower rate in Australia than it is in Italy,in the long run:

Accepted Answer

When a country has a higher inflation rate, its currency tends to depreciate relative to countries with lower inflation rates. Thus, the Australian dollar should depreciate relative to the euro. Additionally, slower productivity growth can lead to a weaker currency, as it reduces the international competitiveness of a country's goods and services. Therefore, the euro should appreciate relative to the Australian dollar in the long run.

Question 14

Consider a textbook situation in which Australia and the USA are experiencing similar inflation rates.If the rate of inflation were to increase significantly in Australia,relative to the USA,which of the following impacts would be expected to occur?

Accepted Answer

When inflation increases significantly in Australia relative to the USA, Australian goods become relatively more expensive. This leads to Australians seeking cheaper US goods (A), overseas buyers preferring US goods over Australian ones due to better prices (B), and the price of Australian exports to the USA increasing due to the higher domestic prices (C). Thus, all given impacts are expected to occur.

Question 15

If the British pound appreciates against the Australian dollar:

Accepted Answer

When the British pound appreciates against the Australian dollar, it means that each pound can buy more Australian dollars than before. This makes Australian goods cheaper for British consumers when priced in pounds, as they need to spend less of their currency to purchase the same amount of Australian goods.

Question 16

In a floating exchange rate regime,the exchange rate is the equilibrium price of the currency.Changes in supply for a currency will cause changes in the equilibrium exchange rate.Which of these statements in relation to the AUD supply curve in the FX market is incorrect?

Accepted Answer

A) is incorrect because a rise in the price of foreign exchange actually means foreign currency priced goods, services, and assets become more expensive for AUD holders, not cheaper. This is because they would need more AUD to purchase the same amount of foreign currency.

Question 17

If the price of a local currency declines,then it follows:

Accepted Answer

If the price of a local currency declines, it means that it takes more units of the local currency to purchase a unit of foreign currency. Therefore, it is equivalent to an increase in the price of the foreign currency. Option A is incorrect because a decrease in the domestic currency actually leads to price increases for foreign goods. Option C is incorrect because a decline in the domestic currency will lead to an increase in the demand for foreign currency. Option D is incorrect because a decline in the domestic currency usually leads to a decrease in the quantity supplied as it becomes less profitable for suppliers to produce goods for export.

Question 18

Consider a textbook situation in which Australia and the USA are experiencing similar low rates of inflation.Then if the rate of inflation were to increase significantly in USA,relative to the Australia,which of the following impacts would be expected to occur?

Accepted Answer

If inflation in the USA increases significantly relative to Australia, the prices of goods and services in the USA would rise, making them more expensive for Australian consumers. This would likely lead to a decline in Australian demand for USA goods and services.

Question 19

If the price of a local currency increases,then it follows:

Accepted Answer

When the price of a local currency increases, it means the currency has appreciated. This typically leads to an increase in the quantity of local currency supplied to the market as holders may want to take advantage of the higher value.

Question 20

If German demand for Australian exports increases at the same time as Australian productivity increases,relative to German productivity,in the long run:

Accepted Answer

If German demand for Australian exports increases, this means there will be an increase in demand for the AUD dollar. At the same time, if Australian productivity increases relative to German productivity, this means that Australian products are becoming relatively cheaper and more competitive, which should lead to an increase in demand for the AUD dollar. As a result, the AUD dollar should appreciate in value relative to the euro.

Quiz 16: Foreign Exchange: Factors That Influence the Exchange Rate