Aggregate Effects on Exchange Rates. Assume that United States residents invest

heavily in the Australian government and stocks. In addition, Australian residents invest

heavily in the United States.

Because your firm imports goods from Australia, you are assigned to forecast the value of AUD

(the Australian dollar) against the USD - i.e., you forecast St(AUDUSD). Explain how each of

the following conditions will affect the value of the AUD, holding other things equal. Then,

aggregate all of these impacts to develop an overall forecast of the AUD's movement against

the USD. (Please plot a figure to explain each condition, except for question f. No figures, no

points.)

a. U.S. inflation has suddenly increased substantially, while Australian inflation remains low. (7

points)

b. The U.S. interest rates have increased substantially, while the Australian interest rates remain

the same. (7 points)

c. The income level in the U.S. increased substantially, while the Australian income level has

remained unchanged. (7 points)

d. The U.S. is expected to impose a new small tariff on goods imported from Australia. (7 points)

e. In Australia, the recent dysfunction within the two major political parties has seen seven

different Prime Ministers take office in the past decade. You expect that this situation may be

going to get worse and assume Australia is not a safe haven. (7 points)

f. Combine all expected impacts to develop an overall forecast. (2 points)