Choose the combination of two words that best fill the gaps in the following sentence: If the Australian exchange rate falls (Australian dollar depreciates), the price to foreigners of Australian produced goods and services ____ and so the quantity of Australian dollars demanded ____.

Question

BlackTom AI · Accepted Answer

A depreciation of the Australian dollar makes Australian goods cheaper for foreigners in their currency, so the price to foreigners falls and foreign demand for Australian dollars increases.

1. Relevant knowledge points and concepts
- Exchange rate (e) expressed as foreign currency per Australian dollar (e.g., USD per AUD). A fall in e means the AUD depreciates (each AUD buys fewer units of foreign currency).
- Price to foreigners of an Australian good = domestic price in AUD × e (foreign currency per AUD).
- Quantity of AUD demanded by foreigners is driven by foreign purchases of Australian goods and assets; when Australian goods become cheaper in foreign currency, foreigners buy more, increasing demand for AUD.

2. Step-by-step reasoning
- Let P_AUD be the price of an Australian good in AUD and e be USD per AUD.
- If e falls (AUD depreciates), convert P_AUD into foreign currency: P_foreign = P_AUD × e.
- With e smaller, P_foreign becomes smaller for the same P_AUD. Lower foreign price raises foreign quantity demanded of Australian goods.

3. Calculations (intermediate steps)
- Example: P_AUD = 10 AUD. Initially e_old = 0.80 USD/AUD → P_foreign_old = 10 × 0.80 = 8 USD.
- After depreciation e_new = 0.70 USD/AUD → P_foreign_new = 10 × 0.70 = 7 USD.
- Foreigners see a price drop from $8 to $7, so they demand more Australian goods and must buy more AUD to pay.

4. Why the correct answer is correct
- Depreciation lowers the foreign-currency price of Australian output, which increases foreign purchases of those goods and thus increases the quantity of AUD demanded (movement along the demand curve for AUD).

5. Why the other options are incorrect
- a (rises; decreases): Wrong because price to foreigners does not rise when the AUD depreciates, and demand would not decrease.
- b (falls; decreases): Incorrect because while the price falls, quantity demanded rises (not decreases).
- c (rises; increases): Incorrect because the price to foreigners does not rise under depreciation.

6. Conclusion
The correct choice is d. falls; increases, which matches the provided answer.

Choose the combination of two words that best fill the gaps in the following sentence: If the Australian exchange rate falls (Australian dollar depreciates), the price to foreigners of Australian produced goods and services and so the quantity of Australian dollars demanded .Single choice

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Choose the combination of two words that best fill the gaps in the following sentence: If the Australian exchange rate falls (Australian dollar depreciates), the price to foreigners of Australian produced goods and services ____ and so the quantity of Australian dollars demanded ____.Single choice

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Choose the combination of two words that best fill the gaps in the following sentence: If the Australian exchange rate falls (Australian dollar depreciates), the price to foreigners of Australian produced goods and services and so the quantity of Australian dollars demanded .Single choice