How to answer this economics question? Smart people please answer! (1 Viewer)

[NWO]

2011: Discuss the impact of changes in the domestic and global economy on Australia's exchange rate.

It only asks for the IMPACTS. Since it doesn't mention FACTORS, should i also talk about it as well? Otherwise i have nothing to write about- Do i also mention balance of payments, structural and cyclical factors? or just demand and supply factors?
Thanks. Ideas and tips?

 

[Randox]

Not really a 'smart person' but anyway...

That was a good question that year. Tricked a lot of students from what I heard... Read the question a few times and understand what it is asking. Just because it says the word impacts doesn't mean that it wants you to talk about the impacts of a depreciation/appreciation. It wants only the factors but you need to relate it to the global and domestic economy. Relate the real life situation to the theory in the text book. EG: mining boom, increased demand for Australia's exports therefore appreciation. Use stats to support. we have had a sustained appreciation of the dollar since the GFC due to this. It has risen from just over 60 cents (if i recall correctly) to its post float high in july 2011 of 1.11 (again not sure if this is exactly correct). Also the Rba has cut the cash rate numerous times recently decreasing the attractiveness of investing in Australia. Less people demand australian dollars and would rather sell australian dollars for other currencies since their interest rates may be higher (use stats). Australian dollar has consequently dropped ~15% in 4 moths due to this.

So much you can talk about with the GFC as well linking textbook theory.

Hope I helped.

look at the marking centre notes for that year...
http://www.boardofstudies.nsw.edu.au/hsc_exams/hsc2011exams/notes/economics.html

 

[ROTUS]

Basically, this question is not focused on the impacts of the movements of the currency on the domestic/global economies...rather it is actually asking you in an obscure way the reasons for the movements in the exchange rate-where both the domestic and global economies have been responsible. So as the question states, "How has have the domestic/global economy impacted on Australia's exchange rate" This question really demands you to have a knowledge of the current economic climate. (Perhaps 06-to current?) Basically what has happened is that the $A has been appreciating for the past couple years, well up until May. Since May it has depreciated about 14%, (going from a high of 1.07? to a low of 0.90 a couple weeks ago, whilst it has picked up again in the last couple weeks. The movements in the $A has said to be due to the mining boom etc.. but there are actually a number of other factors that have also led to this..
Here is a bit of a structure
Intro:
-definition of exchange rate
-perhaps brief intro on the movement of $a in past couple years, briefly outline why/how this has occurred.
-relate this back to question, saying both domestic and global economies have played a major role in recent movements

Body: (should be in chronological order)
Natural resources boom-A lot of economies are now rapidly industrialising --> they require our natural resources to continue to industrialise --> increased demand -->appreciation.
Decreased investment opp overseas/improved investment opp here-has meant ppl are more inclined to invest in stable economies such as Aus. (Perhaps bring in European sovereign debt crisis)
High levels of inflation overseas-means they prefer investing in Aus-->again increase in demand for $A etc.
In addition, our exchange rate simply measures price of our currency relative to another currency….so appreciation relative to $us does not necessarily $a is becoming stronger relative t oall currencies….it may just mean that buying power of $A is the same, whilst the $Us dollar is comparatively falling…(as is the case now)
Then you can talk about the encouraging eco outlook for the US, which has meant their dollar has improved…meaning ours has comparatively depreciated. (from may onwards this has been the trend)
However very recently, the US Feds were worried this was not the case…meaning our $A has appreciated again…
You can also pepper in more conventional (textbook) reasons for appreciation, e.g. currency speculation may also play a role in determining exchange rate, supposed increase in investor confidence due to change in gov  which may be seen to have better stability etc.)