Question:

The demand for Australian-made motorcycles in Japan is given by Japanese demand = 10000 - 0.001(price of Australian motorcycles in yen). Similarly, the demand for Japanese-made motorcycles in Australia is: Australian demand = 30 000 - 0.2(price of Japanese motorcycles in dollars). The domestic price of an Australian-made motorcycle is $20 000, and the domestic price of a Japanese-made motorcycle is 2 500 000. From the perspective of Australia, find the real exchange rate in terms of motorcycles and net exports of motorcycles to Japan, if

a) the nominal exchange rate is 100 yen per dollar (2 marks)

b) the nominal exchange rate is 125 yen per dollar. (1 mark)

c) How does an appreciation of the dollar affect Australian net exports of motorcycles (considering only the Japanese market)? (1 marks)