In this figure two possible demand curves are labelled D1 and D2; two possible supply curves are labelled S1 and S2 and four possible equilibrium points are labelled A, B, C and D.

These labels can be used to describe various scenarios in terms of shifts of demand and/or supply curves and the resulting new equilibrium exchange rate.

Describe what will happen in this market using the above graph and corresponding labels in the following scenarios. Carefully explain each step.

(a) European demand for Australian wine increases by 50%. Assume that the market is initially in equilibrium at point A. (3 marks)

(b) Europe experiences a recession. Assume that the market is initially in equilibrium at point B. (3 marks)

(c) Australian banks increase their holdings of the bonds issued by the European Central Bank. Assume that the market is initially in equilibrium at point D. (3 marks)

(d) Interest rates in Australia increase relative to those in the European Union. Assume that the market is initially in equilibrium at point A. (3 marks)