5. The Australian trade deficit during the 1980s was due largely to the rise in the Australian budget deficit. On the other hand, the popular press sometimes claims that the increased trade deficit resulted from a decline in the quality of Australian products relative to foreign products.

a. Assume that Australian products did decline in relative quality during the 1980s. How did this affect net exports at any given exchange rate ?

b. Use a three-panel diagram to show the effect of this shift in net exports on the Australian real exchange rate and trade balance.

c. Is the claim in the popular press consistent with the model in this chapter? Does a decline in the quality of Australian products have any effect on our standard of living? ( Hint: When we sell our goods to foreigners, what do we receive in return?)

12. Over the past decade, an increasing number of Chinese have decided to invest in Australia. That is, Australian net foreign investment in China is negative. a If the Chinese decided they wanted to buy more Australian assets, what would happen in the Australian market for loanable funds? In particular, what would happen to Australian interest rates, Australian saving and Australian investment? b What would happen in the market for foreign-currency exchange? In particular, what would happen to the value of the dollar and the Australian balance of trade?

7. What is happening to the Australian real exchange rate in each of the following situations? Explain.

a. The Australian nominal exchange rate is unchanged, but prices rise faster in overseas countries than in Australia

b. The Australian nominal exchange rate is unchanged, but prices rise slower abroad than in Australia

c. The Australian nominal exchange rate declines, and prices are unchanged in Australia and abroad

d. The Australian nominal exchange rate declines, and prices rise faster abroad than in Australia.