PLEASE EXPLAIN USING SIMPLE WORDS. NO CALCULATIONS ARE REQUIRED. EMPHASIS ON STATIONARITY OF THE GRAPHS

Q1. The Australian dollar is regarded as a commodity currency. Assuming that demand for iron ore is not affected by changes in commodity prices, this implies that an increase in the commodity price drives the external value of the Australian dollar. Panel 1A is a plot of the commodity price index (CP) that captures the iron ore price. Panel 1B is a plot of the external value of AUD expressed in terms of the Chinese Yuan (EXRATE) for the period Feb 2010 to Aug 2021. Panel 1A Panel 1B 160 7.5 7.0 140 6.5 120 6.0 V 100 5.5 80 mume 5.0 um 60 4.5 40 4.0 10 11 12 13 14 15 16 17 18 19 20 21 10 11 12 13 14 15 16 17 18 19 20 21 (a) Briefly explain the movement of the CP and EXRATE. [2]