Economics

Review exercise 3

A rise in the inflation rate relative to our major trading partners reduces international competitiveness and decreases the demand for Australian exports. Reduced demand for exports would affect the demand for Australian dollars and a currency depreciation may occur. On the other hand, lower rates of inflation will increase the demand for exports and result in an appreciation of the Australian dollar.

Another point to note here is that high rates of inflation in Australia may mean imported goods have become cheaper than domestically produced products. Consumers in this case will purchase increased amounts of imports resulting in an increase in the supply of Australian dollars to the forex market. A depreciation of the Australian dollar may result.