ECON101 Business Economics

Explain how the equilibrium exchange rate is determined in a flexible exchange rate regime. 2.Australianoperates a flexible exchange rate regime and the value thedollar is determined in the foreign exchange market. Use the flexible exchange rate diagram to analyse the impact of changes in the relative values of the following economic variables on the exchange rate, ceteris paribus:a. Relative inflation rates: Increase in US rate of inflation relative to AustraliaEffect for Australian residentsUS imports more expensive, decreasing demand for these goods; reducing the supply of AUDEffect for US residentsSome US demand for goods and serviceswill switch to Australian goods and services, increasing demand for AUD to pay for them.Overall, the Australian dollar would appreciate.b. Relative national income growth rates: Australian income growth rates rise relative to the US.Australian demand for imports increases, increasing the supply of AUD, which causes the AUD to depreciateAnother effect could be an increase in foreign investment in Australia, increasing the demand for AUD, causing the AUD to appreciateNet effect depends on which effect is greaterc. Relative interest rates: Australian interest rates rise relative to the USEffect for US residentsUS residents and companies may redirect some of their cash into Australian interest-bearing instruments, increasing the demand for the AUDEffect for Australian residentsAustralian investors and businesses are more likely to keep their surplus funds invested in Australia, causing a decrease in the supply of the AUDNet effect is that AUD will appreciate3.Suppose the Australian economy is in recession. (i)What monetary policy action would the Reserve Bankof Australia take to overcome the recession? The RBA would ease monetary policy by decreasing the cash rate.(ii)How would the nominal exchange rate be affected? Illustrate your answer with the flexible exchange rate diagram. Would Australia's international competitiveness improve or worsen, ceteris paribus? Decrease in return on Australian financial assets relative to overseas'; Demand for Australian dollar would decrease and supply would increase; Nominal exchange rate would depreciate.International competitiveness would improve: Real exchange rate would depreciate, holding domestic and foreign price levels constant.(iii)How would the policy affect real GDP, inflation and the unemployment rate?Use the AS-AD model to illustrate your answer. Aggregate demand increases and AD curve shifts to the right as output increases. The inflation rate would increase and unemployment rate would decrease.QUESTIONS4.How would equilibrium quantity and price and market efficiency be affected in the following scenarios? Illustrate your answer with the demand and supply diagram.a.The government pays subsidy to potato farmers. How would the elasticity of the supply curve affect your answer?b.The government issues $10 to families to reduce cost of restaurant meals purchased. How would the elasticity of the demand curve affect your answer?5.Use the AS-AD modelto analyse the short-run impact of the following shocks on real GDP, inflationrate, and unemployment rate. Assume that the economy was operating at the long-run equilibrium before each shock. a.unexpected increase in wagesb.unexpected increase in the price of oil.6.What type of fiscal policy would the government implement to overcome the short-run impacts of the shocks you identified in question 5. What would be the long-run impact on those variables, after the government’s fiscal policy?7.Suppose the economy is recession. What type of monetary policy would the RBA implement to overcome the recession? Explain the monetary policy transmission process and how the policy would affect the economy