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Part B: Short Answer (30 marks total) 1. 10 marks. The daily US dollar/Australian dollar foreign exchange market is perfectly competitive. The following equations describe
Part B: Short Answer (30 marks total) 1. 10 marks. The daily US dollar/Australian dollar foreign exchange market is perfectly competitive. The following equations describe the market: 9 =5 -P q = 0.5 + 2p where p is the exchange rate (i.e., the price of 1 US dollar in Australian dollars) and q is the quantity of US dollars transacted (in billions). (a) Solve for the equilibrium exchange rate and the equilibrium quantity of US dollars transacted daily in this market. (6 marks) b) Suppose that the Reserve Bank of Australia (RBA) is committed to maintaining an exchange rate of A$1.40=US$1.00. Will the RBA have to buy or sell US dollars to maintain the fixed rate? Explain. (2 marks) (c) How many US dollars will the RBA have to buy or sell to maintain the rate of A$1.40=US$1.00? (2 marks)
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