Exchange rate basics
What is an exchange rate?
The value of one currency in terms of another currency.
What happens to exports when the AUD depreciates?
Increases the volume of Australian exports because they become cheaper relative to overseas goods and services.
What happens to employment when export volumes rise?
Employment increases, unemployment decreases
What is the balance of payments concerned with: volume or value?
The value – that is, prices as well as quantity – of exports and imports
If the Australian dollar goes down, who benefits — Aussie tourists or overseas visitors to Australia?
Overseas visitors to Australia
What does it mean if the Australian dollar appreciates?
An increase in the value of the Australian dollar.
What effect does a depreciation have on import prices?
Imported goods and services become relatively more expensive
Name one way depreciation can lead to inflation.
Prices of imported goods and services increase
After a depreciation, what usually happens to the cost of imports?
They become more expensive.
What do we call Australian products that compete with things we import?
Import-competing goods
If 1 AUD = 0.75 USD, how many AUD would you need to buy something that costs $150 USD?
$150 ÷ 0.75 = 200 AUD
Name one sector of the economy that benefits from a weaker AUD
Australian exporters
What might the RBA do if inflation rises too much?
Tighten monetary policy
What is the ‘J-curve’ effect?
In the short run, depreciation worsens net exports, but improves them over time
Why don’t shops always change prices right away when the dollar drops?
Because the dollar might go back up, and they want to wait and see.
True or False: A depreciation of the Australian dollar makes overseas holidays cheaper for Australians.
False – a depreciation makes overseas goods and services more expensive for Australians.
Why might Australians buy fewer imported goods when the AUD is weaker?
Because imported goods and services are more expensive
What is the relationship between depreciation, national income, and demand?
Depreciation increases national income, which increases demand for non-tradable goods and services.
What happens over time to exports after the dollar gets weaker?
Exports increase because they become cheaper for other countries to buy.
What happens to the price of overseas holidays for Australians when the dollar gets weaker?
They become more expensive because Australians need more dollars to exchange for foreign currency.
What are the two main effects exchange rate changes have on the economy?
A direct effect on prices of goods/services
An indirect effect on economic activity and inflation
Explain how a depreciation can impact both import and export volumes.
Export volumes increase as goods are cheaper for foreign buyers; import volumes decrease as overseas goods are more expensive for locals.
What is the time lag for exchange rate effects to fully impact inflation and activity?
Between one and three years.
Why might the weaker dollar help Australia’s trade in the long run?
Because it boosts export sales and reduces imports
Why might a weaker dollar lead to more jobs in Australia?
Because Australian goods become cheaper overseas, so more are sold, and businesses may hire more workers to keep up.