Terminology & Measurement
A Japanese café wants to be paid in JPY. This is what an Australian tourist must do with their AUD before they can buy a coffee there.
Convert/exchange currency
This is what economic agents are doing when they buy AUD after having sold a different currency.
demanding AUD (creating demand for AUD)
When foreign investors move their money into Australia, they must do this first — which increases demand for AUD.
convert their money into AUD
A weaker AUD makes Australian exports cheaper for foreigners and imports more expensive for Australians — this is the effect on this specific component of Aggregate Demand.
net exports (X-M) rising
This is the correct term for $1 AUD = $1 USD.
parity
This index averages the exchange rate against a basket of foreign currencies, weighted by their importance to Australia's trade, and currently sits around 62.3.
Trade-Weighted Index (TWI)
If demand for AUD increases relative to supply, this happens to the demand curve, and this happens to the exchange rate.
the demand curve shifts right and the AUD appreciates
Investors move their money to whichever country offers this, relative to other countries.
the highest interest rate (highest rate of return)
This describes the overall relationship between the exchange rate's effect on AD and its effect on AS.
an opposite (inverse) effect
This is the correct term for when $1 AUD = $1.50 USD, since one AUD now buys more than one USD.
AUD trading above parity (a "strong" AUD)
Because it's an index rather than a single bilateral rate, the TWI can never reach this particular state.
If supply of AUD increases relative to demand, this happens to the exchange rate as it moves from ER1 to ER2.
depreciates
If Australia's inflation rate runs higher than its trading partners', this happens to demand for Australian exports — and therefore to demand for AUD.
both fall (exports become uncompetitive)
A stronger AUD lowers the price of imported inputs and capital equipment for local firms — this is the effect on Aggregate Supply.
AS increasing (shifting right, as production costs fall)
You can't just call the AUD "strong" or "weak" on its own — you must always specify this...
which currency you're comparing it against
The TWI is described as less of this quality than the bilateral rate — meaning it doesn't swing up and down as sharply.
volatile
This is what happens to the exchange rate when supply of AUD decreases relative to demand.
appreciates
A rise in the price of this commodity — Australia's largest export — would increase export receipts and demand for AUD.
Iron ore
If the AUD depreciates, import prices for firms' inputs rise — this is the effect on Aggregate Supply.
AS decreasing (shifting left, as production costs rise)
This is the current value of the Trade-Weighted Index, measured from a base year of 1970.
62.3
This is the term for the value of the Australian dollar expressed against just one other country's currency, such as AUD/USD.
bilateral exchange rate
Using the demand/supply framework, this is the compounding effect on the exchange rate of demand for AUD rising at the same time supply of AUD falls.
a larger appreciation than either shift would cause on its own
This is the practice of buying or selling a currency purely to profit from anticipated changes in the exchange rate.
currency speculation
A sustained AUD depreciation boosts net exports (raising AD) while raising import costs (lowering AS) — this is the combined pressure it puts on the price level.
upward/inflationary pressure
This is Australia's current cash rate (4.35%), which drives foreign investment flows via the relative interest rates factor.
RBA cash rate (official interest rate)