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effet of interest rate (1 Viewer)
- Thread starter Blondie
- Start date
1. Lowers aggregate demand (less consumption, investment by firms), slowing down the economy. ---> effects of lower economic activity. less growth, less employment, less inflation...
2. Encourages foreign investment into Australia through the difference in interest rates making Australia a more attractive place to invest.
3. 1 and 2 decrease supply of AUD and increase demand for AUD resulting in an appreciation --->effects on ToT, BoP, international competitiveness.
...there must be more but i can't think of em....
2. Encourages foreign investment into Australia through the difference in interest rates making Australia a more attractive place to invest.
3. 1 and 2 decrease supply of AUD and increase demand for AUD resulting in an appreciation --->effects on ToT, BoP, international competitiveness.
...there must be more but i can't think of em....
TastesGoodBut
Member
dont those top two increase demand... not lower supply??
altho yeh same thing basically
altho yeh same thing basically
timmii
sporadic attendee
- Joined
- Nov 9, 2002
- Messages
- 928
1 - reduces investment and consumption so reduces AD (and therefore hopes to limit inflationary pressures)
2 - By increasing the interest rate differential between australia and the rest of the world, capital inflows increase, seeking higher rates of return ---> exchage rate appreciation
3 - exchange rate appreciation decreases the competitivity of australian exports and therefore reduces AD further as export income declines. Imports become relatively cheaper and therefore trade balance and CAD worsen
(for those confused bout the balance of paymentsm remember that investment inflow increase the financial account surplus, while increased import expenditure then increases the CAD...it can become a bit of a spiral then of the two feeding off each
other and $A appreciations..)
4 - Unemployment may increase because of the decline in AD, particularly in export oriented industries.
2 - By increasing the interest rate differential between australia and the rest of the world, capital inflows increase, seeking higher rates of return ---> exchage rate appreciation
3 - exchange rate appreciation decreases the competitivity of australian exports and therefore reduces AD further as export income declines. Imports become relatively cheaper and therefore trade balance and CAD worsen
(for those confused bout the balance of paymentsm remember that investment inflow increase the financial account surplus, while increased import expenditure then increases the CAD...it can become a bit of a spiral then of the two feeding off each
other and $A appreciations..)
4 - Unemployment may increase because of the decline in AD, particularly in export oriented industries.