Australia's call for an international investigation into the origins of COVID19 in April 2020 resulted in China taking several measures to impede Australian imports. In May 2020, China slapped anti-dumping and anti-subsidy duties of 85% against Australian barley. In November 2020, China announced anti-dumping duties ranging from 107% to 212% on Australian bottled wine imports. China has also placed restrictions on beef, cotton, timber, coal, and lobster imports.

Use a diagram showing the exchange rate, expected currency returns, and money holdings to analyze the short-term and long-term effects of a temporary decrease in demand for Australian exports on the nominal Australian interest rate and the nominal spot exchange rate. Let the Australian Dollar (AUD) be the domestic currency.

Are your conclusions different if the decrease in demand for Australian exports is permanent? Explain your answer.