Question 19 [7 Marks]

PART A: The US and Australia operate floating exchange regimes, and they trade with each other. The COVID-19 pandemic has caused Australias national income to become even further below US national income. Discuss how lower relative Australian national income would impact the Australian dollar (AUD), ceteris paribus. Your answer must include the role of the actions of Australian and US residents, respectively. [3.5 marks]

PART B: Supposed the Reserve Bank of Australia (RBA) increased the cash rate. Everything else remaining the same, explain how the exchange rate and net exports would be affected. [3.5 marks]

INSTRUCTIONS:

1. Type your answer in the space below

2. Clearly label each part of your answer