Open Economy and Exchange Rates

a) Did the Australian dollar appreciate or depreciate in the above figure? Provide three different reasonings to explain the appreciation or depreciation of the Australian dollar in this case? (4 marks)

b) Will the appreciation of the Australian currency affect Australias current account in its balance of payment? How? (2 marks)

c) Let us imagine that the income for all Australians increased and therefore created an increase in demand for British cars in Australia. How will this affect the exchange rate in the above figure from P1 and why? (3 marks)

d) The Australian economy is a small open economy and allows its currency to float against other currencies with occasional central bank intervention. Currently, the RBA has implemented a contractionary monetary policy to stimulate the economy. How would the aims of RBA be achieved in a small open economy like Australia? (3 marks)