PART A:An economist has predicted that Australia's fiscal and monetary policy responses to the COVID-19 pandemic, would result to higher interest rates in Australia relative to the United States of America (USA) which, in turn, would cause an appreciation of the Australian dollar. How would the actions of Australian residents and USA residents cause the Australian dollar to appreciate?

Use the supply and demand diagram of the Australian dollar to illustrate your answer.

Part B:Draw the flexible exchange rate diagram of the USD/AUD. Explain in words what is expected to happen to the AUD if there is a forecast increase in Australia's real GDP relative to USA'.