Answer to Question #35543 in Macroeconomics for kiran

Question

the australian dollar has fallen by 10 US cents in the last few months.what are the macro economic consequences of this currency movement?

Answer 1

the australian dollar has fallen by 10 US cents in the last few months.what are the macro economic consequences of this currency movement?

Solution

The depreciation of the australian dollar is beneficial to exporters as they get an opportunity to sell goods in foreign markets at prices below the world average and it creates a competitive advantage for them. But the fall of the currency is unfavorable for importers, because it leads to rise in imports prices, which stimulates the growth of domestic prices in the country, leads to reduction in the volume of imported goods and consumption. At the same time lowering the exchange rate of the currency leads to a reduction in real debt denominated in local currency and increase external debt denominated in foreign currency. Also, The depreciation of the australian dollar leads to a reduction in real value of savings denominated in local currency and increase in real value of savings denominated in foreign currency