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?

Please show how I would show this in a diagram.

Answer 1

As economic weakness in austrailia will badly affect the value of dollar. the value of dollar will depriciate in comparison of chinese yuan. and declining growth and corporate profits can cause investers to take their money elsewhere which will affect the dollar badly. and decreasing value of dollar will help china's exports gain market share when its goods are less expensive compared to goods priced in strong currencies: 1. commodity prices   2. Interest rate differentials 3. purchasing power parity   4. Government credit ratings   5. sentiment and speculation

this diagram shows the whole process.