Assume Indonesia and Australia are major trading partners. If Indonesian incomes rise relative to Australia's, ceteris paribus, we should expect

Question

BlackTom AI · Accepted Answer

Higher Indonesian income raises Indonesians' demand for imported goods, including Australian exports. Key concepts: (1) income elasticity of demand — as domestic income rises, consumers buy more imports; (2) the foreign exchange market — payments for Australian goods require Australian dollars (AUD), so increased purchases of Australian exports raise demand for AUD; (3) currency appreciation/depreciation — increased demand for a currency tends to raise its value.

Step-by-step reasoning:
1. Indonesian incomes increase relative to Australia’s, ceteris paribus. Indonesian consumers and firms have more purchasing power.
2. With greater purchasing power, Indonesians increase purchases of foreign goods and services. Because Australia is a major trading partner, Indonesian demand for Australian exports rises (more coal, iron ore, education services, manufactured goods, etc.).
3. To pay Australians, Indonesian importers must obtain AUD. They sell rupiah and buy AUD in the foreign exchange market, so the demand curve for AUD shifts right (increase in demand for Australian currency).
4. With a higher demand for AUD and unchanged supply, the exchange rate (price of AUD in rupiah) rises — the Australian dollar appreciates relative to the Indonesian rupiah.

Why the correct answer is correct:
- It exactly matches the causal chain: increased Indonesian incomes → increased demand for Australian exports → increased demand for AUD → appreciation of AUD.

Why the other options are incorrect:
- (a) says “increase in demand for Australian imports” (i.e., goods Australia imports). That would describe Australians buying more foreign goods, which is not implied by higher Indonesian income.
- (c) claims increased demand for Indonesian exports and increased supply of AUD; but higher Indonesian income leads to more imports into Indonesia, not greater foreign demand for Indonesian exports, and it increases demand for AUD rather than its supply.
- (d) claims increased demand for Indonesian exports and appreciation of Indonesian currency; again, that reverses the direction of trade and currency effects.

Therefore the correct choice is b.

Assume Indonesia and Australia are major trading partners. If Indonesian incomes rise relative to Australia's, ceteris paribus, we should expectSingle choice

Similar Questions

The J-curve effect theorizes a depreciation will cause a:

A domestic firm can minimize the negative effects of an appreciation of the domestic currency by: Check all correct answers Each choice is worth 1 point, which you will receive if you correctly either check or do not check the choice

Imagine inflation in Australia is rising at a much faster rate than in China, making Chinese products relatively cheaper for Australians and other foreigners. Which of the following effects is likely?

Suppose a computer costs $500 in the United States. With the price of the computer given in local currency, the Indian rupee is _ by __%.

Which of the following conversions results in the formation of a different shape around the carbon atom?

Consider compound X which is an ester:X reacted with hot aqueous sodium hydroxide solution and formed compounds M and N. X reacted with an aqueous sulfuric acid solution and produced compounds M and Q. M is a :

A compound, Y, when mixed with an aqueous solution of sodium carbonate, formed bubbles of gas. Compound Y:

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler