Question 5

(a)Explain, using an example, the effect that an appreciation of exchange rate has on a country's competitiveness in the export and import markets.

[6 marks]

(b)In 2020 Australian produced sugar cost $0.80 per kilo (AUD) and similar sugar produced in Fiji cost $1.00 per kilo (FJD). If the nominal exchange rate was 1.59 FJD/AUD, determine the price of the Fiji produced sugar expressed in Australian dollars, and thus identify which sugar was more expensive? Which country had a comparative advantage in producing sugar?

[1+1+1=3 marks]

(c)If major buyers of Australian coal reduce their demand in response to concerns about the climate impact of coal, explain what you would expect to happen (ceteris paribus) to the Australian exchange rate, relative to the currencies of those coal buying countries. Feel free to include a diagram in your answer.

[5 marks]

[Question 5 = 14 marks]