The exchange rate between the euro and dollar

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Assume that yesterday the exchange rate between the euro and the Australian dollar was 1 euro = 0.6 Australian dollars. Assume that today the euro is trading at 1 euro = 0.70 Australian dollars. Use a correctly labelled graph of the foreign exchange market for Australian dollars per euros to show how this shift in the exchange rate could have occurred. b) How will the change in the exchange rate affect each of the following in Australia in the short run? Aggregate demand. Explain. (ii) The level of employment. Explain. c) Suppose that Australia wants to return the exchange rate to 1 euro = 0.6 Australian dollars. (i) Should the Australian central bank buy or sell euros in the foreign exchange market? (ii) Instead of buying or selling euros, what domestic open-market operation can the Australian central bank use to achieve the same result? Explain.

Reference no: EM131165430

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