Macroeconomics of Open Economies Assignment

Learning Outcome -

• Apply macro-economic theory to analyse contemporary economic issues;
• Understand the foreign exchange market.

Answer all three questions - In all answers, use figures if necessary. No referencing required if only the prescribed textbook is consulted. For other sources, use references.

Questions:

1. If investors expect an increase in the interest rate paid on US deposits, how the Australian exchange rate will change? Explain.

2. If there is a permanent exogenous decrease in the US money supply, please discuss its short run and long run effects on the US and Australian money markets, and the exchange rate, US$/AU$.

3. On 22nd of March 2018, US Federal Reserve raised interest rate by 0.25%. Correspondingly, however, Australian dollar (AU$) appreciated relative to the US dollar. Please search relevant information and use what you have learnt from this unit to explain this AU$ appreciation.