a. A rise in the nominal exchange rate (AUD/MYR) represents a depreciation of the Australian dollar relative to the Malaysian ringgit, but a rise in the real exchange rate (AUD/MYR) represents an appreciation of the Australian dollar. Explain why the situation described above is true. (7.5 marks)

b. The non-cash form of the single currency was introduced on 1 January 1999. Three years later, on 1 January 2002, the Euro was put into circulation in its cash form in the euro area, gradually replacing the national currencies. At present, the euro is legal tender in 17 countries: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. The remaining 11 countries kept their currencies for different reasons.

Why might a group of countries wish to have a common currency and others willing to keep their own currency? Explain the reasons.

(7.5 marks)