TFIN204 20 question

Question 20 [7 Marks] The US and Australia are trading partners, and both countries operate oating exchange regimes. Suppose Australia's interest rates become higher than US interest rates. In response to the change in relative interest rates, discuss how the actions of financial investors in US and Australia would impact the Australian dollar [AUD} {i.e., appreciate or depreciate). Illustrate your answerwith the CORRECT demand and supply diagram of the AUD shown in either diagramA or diagram B. In each diagram, the initial exchange rate before the rise in Australia's interest rate is E1 and nal exchange rate is E2 Select your diagram (A or B) and start the discussion from the initial equilibrium point A, exchange rate E1 and equilibrium quantity of. p marIG] W \"1' MN\" 0' W met-mu DIAGRAM A DIAGRAM B One of the diagrams A or B traces the impact of the change in relative interest rates on the AUD, starting from the Initial equilibrium point A with the exchange rate E1. Select the correct diagram to Illustrate your answer. INSTRUCI'IONS 1.TYPE YOUR ANSWER IN THE SPACE PROVIDED BELOW. 2. SELECT THE CORRECT DIAGRAM AND USE IT TO ILLUSTRATE YOUR ANSWER. 3. DO NOT DRAWA NEW DIAGRAM