Problems with protection   Is the CAD a problem? Goal of external stability   The exchange rate   International investment position   Free trade v protection

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1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix

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The exchange rate

The exchange rate is usually measured by the value of Australian dollar (AUD) compared to the US dollar (USD) or the Trade Weighted Index (where the TWI is the average value of the AUD compared to a weighted basket of foreign currencies of Australia's trading partners).  Australia seeks to ensure that the exchange rate is stable in the sense that it is not subject to volatile rises and falls.  A volatile AUD would indicate that there is international uncertainty about the value of Australia’s exchange rate.  This deters investment in Australian assets, placing (further) downward pressure on the AUD, thereby increasing our international debt obligations because:

The value of the AUD is determined by the demand and supply for our currency in the foreign exchange market  The demand comes from overseas residents seeking to pay Australians with AUD.  This could be for the purchase of Australian exports or other assets (e.g. property, foreign lending, etc).  The supply comes from Australians wishing to sell AUD on the foreign exchange market (e.g. for the purchase of imports or other foreign assets).  

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