The paper 'Reserve Bank of Australia and the Impact on Australian Economy" is a good example of a finance and accounting case study. The exchange rate is one of the most influential factors which has an impact on the economic health of an economy and is one of the most important factors which have to be determined so that organization is able to grow. Exchange rate holds an important aspect in the country’ s trade and is one of the most critical factors which determine the free market operation in the economy.
This paper thereby evaluates the manner in which different factors have an impact on the exchange rate. This is supported by the policies developed by the Reserve Bank of Australia and comparing it to other countries so that the impact and future growth potential for the Australian economy can be ascertained. On the whole, it will help to ascertain the different steps and the manner in which the economy is able to experience free exchange rates determined by the forces of demand and supply. Before moving ahead with the topic it is important to understand the manner in which exchange rate movements have an impact on the trade relationship with other nations.
Economies whose currency value is high faces difficulties in exporting as export becomes expensive whereas imports become cheaper thereby having an impact on the balance of trade. There are different factors which have an impact on the exchange rate of an economy. Some of the factors which have an impact on the exchange rate are as Firstly, inflation has an impact on the exchange rate. A country which has a low inflation rate experiences an increase in the exchange rate primarily due to the fact that the purchasing power of the currency increases.
This has an impact on the interest rate as it reduces which further impacts the exchange rate (Exchange Rate, 2013). Similarly, a country with a high inflation rate experiences a high exchange rate because the value of the currency reduces and the same currency is able to purchase a few items. Thus, a change in the inflation rate has an impact on the inflation rate which the economy witnesses. Secondly, changes in interest have an impact on the exchange rate.
Interest rate, inflation and exchange rate are correlated to each other and a change in one factor has an impact on other factors thereby impacting the overall growth of the economy. The Reserve bank controls interest rate so that they are able to control the value of the currency and hence the exchange rate (Exchange Rate, 2013). A high-interest rate ensures that the lenders are able to get a higher return on the lender money. This leads to an increase in foreign investment from other markets.
This thereby tends to push up the exchange rate as people experience a higher interest rate and profits. While looking to make changes in the interest rate inflation has to be considered and the culmination of the different factors will determine the strategy that the Reserve bank will look to pick. Thirdly, the current account deficit has an impact on the exchange rate. Current accounts highlight the balance of trade between the countries which highlights the manner in which country and its trading partners have indulged in different transactions and highlights the different payments.
A deficit in the account would suggest that the economy is spending more than the economy is earning which results in the creation of deficits (Exchange Rate, 2013). To fulfill the deposit the government has to borrow money and require foreign currency to fulfill the deficit which is appearing. This thereby results in the fall in the exchange rate to attract more and more lenders the government has to provide their better return. The opposite happens in case of excess current account balance, thereby showing the manner in which the changes in current account balance has an impact on the overall growth of the economy and thereby impacting the exchange rate.
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