A. On 1st Jan 2020, a cup of coffee costs four dollars in Australia and 30 Yuan in China. If the inflation rate in 2020 is 5% in Australia and 25% in China, what would be the Australian dollar to Chinese Yuan exchange rate on 1 Jan 2020 and on 1 Jan 2021 (that is, how many Chinese Yuan (CNY) for one Australian dollar (AUD)). (Assume coffee purchasing power parity (PPP) for these two countries during this period.) (2 marks)

B. Calculate and explain the percent appreciation or depreciation of each currency (Australian dollar and Chinese Yuan) from 1 Jan 2020 to 1 Jan 2021 relative to the other currency in part A of this question. (2 marks)

C. Explain clearly and precisely the implications of the exchange rate changes in part B of this question on each of the following: (6 marks)

(i) Australian exports to China?

(ii) Chinese exports to Australia?

(iii) Investment flows from Australia to China?

(iv) Investment flows from China to Australia?

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Coffee Inflation and Currency Exchange A PPP Perspective A Exchange Rate Calculation PPP Approach 1 January 1 2020 Coffee Price Australia AUD 4 Coffee ... View the full answer