Suppose the Australian dollar and Japanese yen are initially in equilibrium at 100 = $1.

The Japanese economy experiences a recession with decreasing real GDP growth.

At the same time, the Reserve Bank of Australia lowers the cash rate. Interest rates in Japan are unchanged.

REQUIRED:

(i)How will these economic conditions in Japan change the value of the Australian dollar (AUD)? Explain your answer with reference to the change in the demand for and or supply of Australian dollars (Note: a diagram is not required for this question).

(ii)Explain the impact that the change in the exchange rate in (i) above will have on:

- the price of Australian exports to Japan;

- the price of Japanese exports to Australia;

- Australia's net exports and

- Australia's real GDP.