a. Assume the Exchange rate for Euro is 1.25 AUD (Australian dollar). If Australians significantly increase their spending on european wine because of its perceived superiority by the Australian population what will be the on the value of AUD. [Explain with the help of the market of either AUD or Euro. You must explain which market you are working with, which curve is affected, which currency gains value and which loses value]

b. As a result of the change in value of AUD above what is effect on the Current Account and Financial Account of Australia. Explain.

2 points

c. If the Nominal exchange rate for Euro is 1.25 AUD per euro, the price level in Australia is 110 and the price level in Europe is 118, calculate the Real Exchange rate assuming Australia to be the domestic economy and Europe to be the foreign economy.

d. Given your calculation of the Real Exchange rate above which economy has relatively cheaper goods?