Consider the bilateral exchange rate between Australia and the US. Suppose the demand for Australian dollars in the foreign exchange market is given by 𝑄=125−50𝐸 where 𝑄 denotes the quantity of AUD and 𝐸 denotes the nominal exchange rate expressed in USD per AUD. The supply of Australian dollars is given by 𝑄=50+50𝐸 . Now suppose the Reserve Bank of Australia pegs the exchange rate at ̅𝐸̅=0.80. Which of the following is TRUE?Group of answer choicesThe exchange rate peg exceeds the market equilibrium exchange rateThere is excess supply of AUDThe Reserve Bank of Australia needs to buy AUD to maintain the pegAll of the other options
Question
Consider the bilateral exchange rate between Australia and the US. Suppose the demand for Australian dollars in the foreign exchange market is given by 𝑄=125−50𝐸 where 𝑄 denotes the quantity of AUD and 𝐸 denotes the nominal exchange rate expressed in USD per AUD. The supply of Australian dollars is given by 𝑄=50+50𝐸 . Now suppose the Reserve Bank of Australia pegs the exchange rate at ̅𝐸̅=0.80. Which of the following is TRUE?Group of answer choicesThe exchange rate peg exceeds the market equilibrium exchange rateThere is excess supply of AUDThe Reserve Bank of Australia needs to buy AUD to maintain the pegAll of the other options
Solution
To answer this question, we first need to find the equilibrium exchange rate in the foreign exchange market. This is where the quantity of Australian dollars demanded equals the quantity supplied.
Setting the demand and supply equations equal to each other, we get:
125 - 50E = 50 + 50E
Solving for E, we get:
E = 1.0
This means that the market equilibrium exchange rate is 1.0 USD per AUD.
Now, let's compare this with the pegged exchange rate of 0.80 USD per AUD set by the Reserve Bank of Australia.
-
The exchange rate peg exceeds the market equilibrium exchange rate: This statement is FALSE. The pegged rate (0.80) is less than the market equilibrium rate (1.0).
-
There is excess supply of AUD: To check this, we substitute the pegged rate into the supply and demand equations. At E = 0.80, the quantity demanded is Qd = 125 - 500.80 = 85, and the quantity supplied is Qs = 50 + 500.80 = 90. Since Qs > Qd, there is excess supply. So, this statement is TRUE.
-
The Reserve Bank of Australia needs to buy AUD to maintain the peg: When there is excess supply, the central bank needs to buy the excess currency to maintain the peg. So, this statement is TRUE.
-
All of the other options: Since not all of the other options are true, this statement is FALSE.
So, the true statements are: "There is excess supply of AUD" and "The Reserve Bank of Australia needs to buy AUD to maintain the peg".
Similar Questions
Suppose the Australian dollar floats against the US dollar and the demand for Australian dollars in the foreign exchange market is given by 𝑄=100−50𝐸 where Q denotes the quantity of AUD and E denotes the nominal exchange rate expressed in USD per AUD. The supply of Australian dollars is given by 𝑄=20+50𝐸 . What is the equilibrium nominal exchange rate?Group of answer choices0.801.001.201.50
Consider the bilateral exchange rate between Australia and New Zealand. Suppose $1 AUD buys $1.05 NZD, the Australian price level is $100 AUD and the New Zealand price level is $110 NZD. Which of the following is TRUE?Group of answer choicesThe Australian dollar has more real purchasing power than the New Zealand dollarIn the long run, the New Zealand dollar is likely to depreciate against the Australian dollarThe real exchange rate is 0.90The real exchange rate is 1.10
Assume that Australia follows a fixed exchange rate system. Suppose the current exchange rate is 1.40 AUdollars per pound without the Reserve Bank of Australia's intervention. In order to defend the fixed rate of 1.60 AUdollars per pound, The Reserve Bank of Australia must intervene in the foreign exchange market and __________ billion pounds. Question 4 Answer a. buy 200 b. buy 300 c. buy 400 d. sell 200 e. sell 300 f. sell 400
Assume that Australia follows a fixed exchange rate system. Suppose the current exchange rate is 1.20 dollars per euro without the Reserve Bank of Australia's intervention. To defend the fixed rate of 1.00 dollars per euro, The Reserve Bank of Australia must intervene in the foreign exchange market and __________ million dollar's worth of euros.
If the exchange rate between AUD and USD is AUD$1=USD$0.7, and the price of good A is AUD$2,000 in Australia, and USD$1,300 in the US. Calculate the real exchange rate of USD (the US) against AUD (Australia). Group of answer choices0.65More information needed0.460.93
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.