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If the Reserve Bank of Australia would like to raise the exchange rate of AUD by...

If the Reserve Bank of Australia would like to raise the exchange rate of AUD by adjusting the interest rate in Australia, what should the Reserve Bank of Australia do? Explain the reason(s).

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Answer #1

As per interest rate parity theory, the the country will lower rate of interest has a stronger currency as compared to those with higher rate of interest in the economy.

F = Forward rate. S = Spot exchange rate. i = Interest rates

Thus, in order to strengthen the exchange rate value of AUD, the bank of Australia should decrease the interest rate in the economy as compared to the country with whom they want to have a better exchange rate.

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