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Factors that affect movements in the Australian Dollar include;


Farming; this is because close to 12% of the value of the AUD comes from farming activities and the related agricultural processes. If any unfortunate events such as drought or restriction that prevents the export of these agricultural products occur, then the AUD will be affected.

            Reserve bank policies; the AUD is quite popular for the bilateral trade between Australia and Japanese Yen, for which an interest rate of close to 4% spreads between these two countries. The Australian bank reserve policies will determine the direction of the interest rate and the profitability of the AUD as far as investment is concerned. (Blundell-Wignall, 2015)

            Mining; the price of the Australian dollar is largely impacted by resources such as oil, gold and coal. This means that depletion of such resources or putting a restriction to their exploitation and also a fall in demand of these resources in the export markets will have an impact on the performance of the AUD.


This movement affects the profitability of Australian businesses in several ways depending on whether it is a depreciation or appreciation;

            When AUD appreciates, the profits from imports would increase because it makes the imports cheap and hence their demands increases. On the other hand, appreciation decreases the profits from exports because it makes the exports to be expensive and hence reduces their demands abroad

            When the AUD depreciates, profitability from the imports decreases because it makes the imports to be expensive thus a reduction in demand. Consequently, it increases profitability from the exports because it makes the exports cheap and thus increases their demand.


            Foreign exchange hedging is a type of a transaction that is carried out by a forex business people or investors to protect their businesses from foreign exchange risks that arises from transactions in foreign currencies. Hedging would assist Australian businesses to diversify globally and take advantage of these global markets without having to incur the risks of currency losses. (Dash, 2013).

Question 2a

Roles of Interest Rates in the Economy

            An increase in the interest rates encourages saving and this leaves them with less disposable income, thereby decreasing the price levels. In contrast, a decrease in the interest rates encourages borrowing and this leaves consumers with more disposable incomes which increases the price levels.

            Price levels are measured using the consumer price index(CPI). It measures the percentage change in the price of basket of goods and services purchased by households.

Interest rates plays a role in the economic growth in that raising it increases the cost of borrowing, which in turns reduces the disposable income and hence limiting consumer expenditures which in turn thwarts economic growth (John, 2014).

            The GDP is the measure of economic growth. It is arrived at by summing the total value of goods and services produced within the country.

            Interest rates can also control unemployment in that lower interest rates would encourage borrowing which would leave the consumers with higher disposable incomes, this increases their expenditure on goods and services and increases demand. It also enables them invest in the economy thereby creation of jobs through these investments and high demands.

            Unemployment rate is the proportion of the labor force that is unemployed. To get to this statistic we need to calculate the total number of people who are unemployed, we then take this total as a percentage of the total labor force. Labor force is the total individuals over the age of 15 who are eligible to work, and it includes those in employment and those unemployed.. (John, 2014).

Question 2b

Expansionary and Contractionary Monetary Policies

            Expansionary monetary policies lead to a decrease in the interest rates. to increase money supply in the economy, the interest rates are lowered so as to encourage borrowing and stimulate economic growth through high expenditures in the economy….

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