Economics

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Analyse the effects of changes in the exchange rate of the Australian dollar (against other currencies) on the Australian economy.
Fluctuations in the exchange rate of the Australian dollar can have significant implications on the Australian economy. The exchange rate is the price of one currency in terms of another economy’s currency. Typically in the case of Australia, the Australian dollar is measured in terms of the US dollar. Changes in the exchange rate, whether the alteration is an appreciation or depreciation, can have negative or positive impacts on the Australian economy.
An appreciation in the exchange rate of the Australian dollar can have a negative effect on the Australian economy. Post GFC, the Australian dollar has experienced a rapid appreciation, reaching a twenty nine year high of $US 1.10 during the 2011. This increase in the Australian dollar has resulted in a decrease in export income as Australian exports have become more expensive in the global market in terms of other currencies leading to a worsening Current Account deficit. Imports have become cheaper, encouraging increased spending on foreign goods and discouraging spending on domestic production, leading to a deterioration of the Current Account deficit. Australian investments carried out overseas have lost value due to the appreciation, reducing the proportion of foreign income earned, directly affecting the net income section of the Current Account deficit resulting in a deterioration. These various effects demonstrate the negative implications an appreciation in the Australian dollar has on the global economy.
Conversely, an appreciation in the exchange rate of the Australian dollar can have a positive effect on the Australian economy. The appreciation of the dollar has allowed Australia’s economy to strive, remaining a popular destination for investment and granting Australian consumers purchasing power. Recently Australian mining companies have had to attain money from foreign

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