Suppose tech-driven financial innovations (Fintech innovations) in the Australian banking and shadow banking sector makes it easier to extend credit to the small-and-medium enterprises (SMEs) in Australia. Consequently, the Australian SME sector shows improvements in productivity when compared with the SME sector in the euro zone countries. What impact such relative improvements in productivity has on the AUD vs Euro exchange rate in the long-run? Given your long-run forecast of the exchange rate, what would you predict about the exchange rate in the short-run (use the market for domestic financial assets to graphically illustrate the short-run impact).

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Q2)

2A. Suppose the CBDC version of the Australian dollar (AUD) has been successful launched in Australia (assume that effective steps have been taken to mitigate the chances of a banking crisis). By using the AD/AS framework (graph), show the positive impacts that will likely follow. Explain.

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2B. Suppose the CBDC version of AUD has been launched; however, some people in Australia start using CBDC wallets as an alternative to keeping money in their transaction deposit accounts; however, a banking crisis does not follow (there are no major bank runs only orderly transfer of funds by some people from their bank accounts to their CBDC wallets). By using the AD/AS framework (graph), show the negative impacts that will likely follow.

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2C. Suppose the CBDC version of AUD has been launched and this leads to a banking crisis, which the RBA could not prevent. By using the AD/AS framework (graph), show the negative impacts that will likely follow.

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