Read the article titled The Australian dollar’s roller coaster ride continues (Business Insider May 17, 2918, uploaded to Moodle), and answer the following questions: (a) Using a Demand and Supply model of exchange rate determination, briefly explain how the exchange rate of the AUD is determined in the forex market, and what factors influence fluctuations of it. (b) Using nominal exchange rate data and trade weighted index data from the Reserve Bank of Australia website (use monthly data for the last three years) and analyse the movement of the AUD relative to that of the USD using a graph. In your opinion what are the factors contributing to this behaviour of the AUD? (c) Summarise the main driving forces behind the recent movement in AUD discussed in this article. Suppose that you expect that the AUD/USD exchange rate is going to change from US 75C per AUD now to US 70C per AUD one year from now. Explain the impact of this depreciation of the Australian dollar on your firm. (e) Suppose that the AUD/USD exchange rate stabilises at around US 73C per AUD one year from now. What action could the Reserve Bank of Australia take in order to bring the exchange rate back to US 75C per AUD, and what side effects might this action have on the Australian economy? Explain your answer. Marking Guide: Marking guide is uploaded on Moodle. Please refer to the marking guide for marking criteria and question weights. Word Limit: 2000 words maximum. Word count (excluding references) must be provided. Note that your analysis is based on the exchange rate of the Australian Dollar and United States Dollar (commonly abbreviated as AUD/USD). For the purposes of this report assume that the current AUD/USD exchange rate is US 75C per AUD
