Question

If we set the real effective exchange rate index of Australia equal to 100 in 2009, and find that in 2010 the Australian dollar has fallen to a value of 95.5, then from a competitive perspective the Australian dollar is:

Select one:

a. overvalued.

b. very competitive.

c. undervalued.

d. There is not enough information to answer this question.

Answer 1

Correct option b. very competitive.

When there is an increase in the the real effective exchange rate index when we say that the net import will increase and the exports will decrease so there is increase in the current account deficit and low domestic demand. but when we see a fall in the real exchange rate then there is increase in the net export and domestic goods becomes more competitive.

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