In a free floating exchange rate regime, the demand and supply for a currency determine its price. For each of the following conditions, explain what is expected to happen to the demand and supply curve for the Australian dollar and therefore its equilibrium price.

Required:

a) The inflation rate in the US suddenly becomes much higher than the inflation rate in Australia. (8 marks)

b) Australias national income increases at a higher rate relative to a stable growth rate in the USA. (8 marks)