Question

Suppose as a result of the COVID-19 outbreaks and the subsequent extensive lockdown measures, the Australian economy goes into a deep recession. Assume also that China has somehow avoided the recession as it could successfully contain the virus in the early stage of the spread. Use the exchange rate market model and relevant diagrams to answer the following questions.

(a) All else equal, how is this economic weakness in Australia likely to affect the value of the dollar against the Chinese yuan?

(b) How might your answer to 3(a) be different if the RBA reacts to the recession by an interest rate cut? Assume that China hasn’t changed its monetary policy.

Answer 1

Answer.

The AUD is not falling only due to crona vi rus pandemic led economic crisis. Last year also AUD fell. The AUD fell last year also. Australia does lot of trade with China bot exports and imports and the pandemic deisturbed the whole supply chain.The resluting fall of AUD has some what helped Australian traders. One third of Australian exports go to China. The Australian dollar is bearing the brunt of investor concerns about China’s likely slowdown.  

while both currencies falling but AUD falling more the steback will be greater for Australia

The RBA doesnot seem to cut interestr rates further in near future, as the governor has mentioned that the rates cuts have fully exhausted tyhe capacity to make any further difference in terms of revival.