Module M10 Quiz: Exchange Rates and the Open Economy
25 questions ยท Introductory ยท Mix of multiple choice, calculation, and short answer
How to use
Attempt each question before clicking Show Answer. For calculation questions, write out your working before checking.
Question 1
Lesson L01 ยท Exchange Rates
What is the difference between nominal and real exchange rates?
Type: Multiple Choice
- A) Nominal is the market rate; real adjusts for inflation differences
- B) Nominal is fixed by the RBA; real is market-determined
- C) Nominal is for trade; real is for financial flows
- D) Nominal is AUD/USD; real is AUD/EUR
Show Answer
Answer: A) Nominal is the market rate; real adjusts for inflation differences
The real exchange rate adjusts the nominal rate for relative price levels between countries, capturing competitiveness.
Question 2
Lesson L01 ยท Exchange Rates
If AUD/USD is 0.65, Australian CPI is 130, and US CPI is 118, what is the real AUD/USD rate?
Type: Calculation
Show Answer
Answer: 0.7161
q = e ร (P*/P) = 0.65 ร (118/130) = 0.7161
Question 3
Lesson L01 ยท Intro
Why does the RBA publish a Trade-Weighted Index (TWI)?
Type: Short Answer
Show Answer
Answer: The TWI provides a broader measure of the AUD's value against all major trading partners' currencies, weighted by trade volumes, not just the USD.
exchange-rates
Question 4
Lesson L01 ยท Exchange Rates
If nominal AUD/USD falls but Australian inflation outpaces US inflation, what happens to competitiveness?
Type: Multiple Choice
- A) Competitiveness improves
- B) Competitiveness worsens
- C) Competitiveness stays the same
- D) It depends on the TWI
Show Answer
Answer: B) Competitiveness worsens
Higher Australian inflation can offset the nominal depreciation, leaving the real exchange rate unchanged or even appreciating.
Question 5
Lesson L01 ยท Exchange Rates
Calculate the percentage change in the real AUD if nominal AUD/USD falls from 0.70 to 0.65 and P*/P rises from 1.0 to 1.1017.
Type: Calculation
Show Answer
Answer: +2.3
(0.7161 - 0.70)/0.70 ร 100 = +2.3% real appreciation despite nominal depreciation.
Question 6
Lesson L02 ยท Exchange Rates
According to relative PPP, if Australian inflation is 4% and US inflation is 2%, how should AUD/USD change?
Type: Multiple Choice
- A) AUD appreciates ~2%
- B) AUD depreciates ~2%
- C) AUD appreciates ~6%
- D) AUD depreciates ~6%
Show Answer
Answer: B) AUD depreciates ~2%
Relative PPP predicts the currency of the higher-inflation country depreciates by the inflation differential (4% - 2% = 2%).
Question 7
Lesson L02 ยท Exchange Rates
If AUD/USD is 0.72, Australian inflation is 3.5%, and US inflation is 1.8%, predict AUD/USD in one year using PPP.
Type: Calculation
Show Answer
Answer: 0.708
eโ = 0.72 ร (1 - (0.035 - 0.018)) = 0.72 ร 0.983 = 0.7078
Question 8
Lesson L02 ยท Intro
Explain why interest rate parity might contradict PPP predictions in the short run.
Type: Short Answer
Show Answer
Answer: Interest rate parity is driven by capital flows seeking higher returns, while PPP is based on trade flows. In the short run, capital flows dominate.
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Question 9
Lesson L02 ยท Exchange Rates
If Australia's interest rate is 4.35% and the US rate is 5.25%, what does uncovered IRP predict for AUD?
Type: Multiple Choice
- A) AUD appreciates 0.9%
- B) AUD depreciates 0.9%
- C) AUD appreciates 9.6%
- D) AUD depreciates 9.6%
Show Answer
Answer: B) AUD depreciates 0.9%
Uncovered IRP: Expected AUD depreciation โ i_AUS - i_US = 4.35% - 5.25% = -0.9%.
Question 10
Lesson L02 ยท Exchange Rates
Calculate the expected AUD depreciation if Australian rates rise to 5% while US rates stay at 5.25%.
Type: Calculation
Show Answer
Answer: -0.25
i_AUS - i_US = 5.0% - 5.25% = -0.25% expected depreciation.
Question 11
Lesson L03 ยท Exchange Rates
When was the AUD floated, and what major policy change accompanied it?
Type: Multiple Choice
- A) 1983; capital account liberalisation
- B) 1991; inflation targeting
- C) 1971; end of Bretton Woods
- D) 2000; GST introduction
Show Answer
Answer: A) 1983; capital account liberalisation
The AUD was floated on 9 December 1983, accompanied by capital account liberalisation allowing free movement of funds in/out of Australia.
Question 12
Lesson L03 ยท Exchange Rates
If iron ore prices rise from US\(90 to US\)180/tonne and export volume is 900m tonnes, by how much does AUD demand rise (in USD)?
Type: Calculation
Show Answer
Answer: 81
ฮRevenue = 900m ร (180 - 90) = US$81b additional demand for AUD.
Question 13
Lesson L03 ยท Intro
Why is the AUD considered a 'commodity currency'?
Type: Short Answer
Show Answer
Answer: Because Australia's export income is heavily tied to commodity prices (iron ore, coal, LNG), making the AUD sensitive to global commodity demand.
exchange-rates
Question 14
Lesson L03 ยท Exchange Rates
Which factor would likely cause the AUD to appreciate?
Type: Multiple Choice
- A) Falling iron ore prices
- B) RBA rate cuts
- C) Strong Chinese growth
- D) Global risk aversion
Show Answer
Answer: C) Strong Chinese growth
Strong Chinese growth boosts demand for Australian commodities, increasing AUD demand.
Question 15
Lesson L03 ยท Exchange Rates
If iron ore prices fall US\(50/tonne and AUD depreciates 1% per US\)10 fall, estimate the total AUD depreciation.
Type: Calculation
Show Answer
Answer: 5
(50/10) ร 1% = 5% depreciation.
Question 16
Lesson L04 ยท Exchange Rate Regimes
State the impossible trinity and which two options Australia chose.
Type: Multiple Choice
- A) Fixed rates, free capital, independent monetary policy - chose fixed + free
- B) Fixed rates, free capital, independent monetary policy - chose free + independent
- C) Low inflation, full employment, growth - chose low inflation + growth
- D) Trade balance, budget balance, current account - chose trade + budget
Show Answer
Answer: B) Fixed rates, free capital, independent monetary policy - chose free + independent
Australia chose free capital flows and independent monetary policy, requiring a floating exchange rate (giving up fixed rates).
Question 17
Lesson L04 ยท Exchange Rate Regimes
A country has US\(12b reserves and faces US\)3b/day speculative selling. How many days until reserves run out?
Type: Calculation
Show Answer
Answer: 4
12 / 3 = 4 days.
Question 18
Lesson L04 ยท Intro
Why might Singapore prefer a managed float over Australia's free float?
Type: Short Answer
Show Answer
Answer: Singapore is a small, trade-dependent economy where exchange rate stability is crucial for inflation control and business planning.
exchange-rate-regimes
Question 19
Lesson L04 ยท Exchange Rate Regimes
Which is NOT a cost of fixed exchange rates?
Type: Multiple Choice
- A) Loss of monetary policy independence
- B) Need for large reserves
- C) Vulnerability to speculative attacks
- D) Automatic stabilisation of trade shocks
Show Answer
Answer: D) Automatic stabilisation of trade shocks
Fixed rates remove the automatic stabiliser function of floating rates, making trade shocks more painful.
Question 20
Lesson L04 ยท Exchange Rate Regimes
If reserves are US\(20b, capital inflows are US\)1b/day, and outflows are US$3b/day, calculate net daily reserve change.
Type: Calculation
Show Answer
Answer: -2
3b outflow - 1b inflow = US$2b net daily drain.
Question 21
Lesson L05 ยท Intro
Explain the J-curve effect after a currency depreciation.
Type: Short Answer
Show Answer
Answer: The trade balance initially worsens as import costs rise (volumes are sticky), then improves as volumes adjust to new relative prices.
exchange-rate-effects
Question 22
Lesson L05 ยท Exchange Rate Effects
If imports are US$245b at AUD/USD=0.70, and AUD falls to 0.62 with fixed volumes, calculate the new AUD import cost.
Type: Calculation
Show Answer
Answer: 395.2
245 / 0.62 = A$395.2b.
Question 23
Lesson L05 ยท Intro
Which industries benefit most from AUD depreciation?
Type: Short Answer
Show Answer
Answer: Trade-exposed sectors like mining, tourism, education exports, and agriculture benefit from improved competitiveness.
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Question 24
Lesson L05 ยท Exchange Rate Effects
Why doesn't AUD depreciation immediately improve the trade balance?
Type: Multiple Choice
- A) Because imports become cheaper
- B) Because export volumes take time to rise
- C) Because the RBA intervenes
- D) Because tariffs offset the effect
Show Answer
Answer: B) Because export volumes take time to rise
Export and import volumes are sticky in the short run due to contracts and adjustment lags.
Question 25
Lesson L05 ยท Exchange Rate Effects
If export revenue rises from A\(400b to A\)500b and import costs from A\(350b to A\)400b after depreciation, what is the trade balance change?
Type: Calculation
Show Answer
Answer: +50
(500 - 400) - (400 - 350) = +50b improvement.