Question

Explain how growth in the demand for​ Australia's natural resources would affect the demand for Australian dollars in the foreign exchange market. Explain how the supply of Australian dollars would change.

Answer 1

The question here is that of the balance of trade and the principles of demand and supply.

According to the Economics principles of demand and supply, when demand is high, prices follow in the same direction and the currency appreciates in value.

So, on one hand, when the demand for Australia's natural resources increases, because the legal tender recognised within Australia's borders is its own currency, trading partners are forced to convert from their currency into the Australian dollars thus creating an increased demand for the currency.

On the other hand, if the value of a countrys imports is more than the value of its export transactions, the opposite would happen, that is, its currency depreciates or loses value.

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