The exchange rate between the Australian dollar and the Indian rupee is determined in a flexible foreign
exchange market.
a. Assume India is currently in recession. What fiscal policy action could the Indian government take to eliminate the recession?
b. What would be the effect of the fiscal policy action identified in part (a) on interest rates in India?
c. Draw a correctly labeled graph of the foreign exchange market for the Australian dollar. Show on your graph the impact of the change in interest rates identified in part (b) on each of the following.
i. The supply of Australian dollars
ii. The equilibrium exchange rate of the Australian dollar
d. What would be the effect of the change in the exchange rate identified in part (c)(ii) on
Australian exports?
e. What would be the effect of the change in Australian exports identified in part (d) on
Australian unemployment?