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Use an AD-AS model to show how a strong Australian dollar impacts Australia's GDP.

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ksa1975 | Student, Undergraduate | eNotes Newbie

Posted May 16, 2011 at 8:40 PM via web

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Use an AD-AS model to show how a strong Australian dollar impacts Australia's GDP.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted May 16, 2011 at 10:54 PM (Answer #1)

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A strong currency, such as the Australian dollar, is a mixed blessing to an economy.  On the one hand, it typically shows that there is some strength in the economy.  On the other hand, it can lower GDP by decreasing exports and increasing imports.

A currency rises, in general, when foreign demand for that country's products rises.  One reason that the Australian dollar is strong is that Chinese demand for Australian iron and coal is strong.  In this way, the strong dollar is a sign of strength.

However, a strong dollar can reduce aggregate demand for Australian products and increase demand for imports.  As the dollar strengthens, imports become cheaper and Australians may buy more of them.  At the same time, Australian exports will tend to become more expensive for foreigners, who will buy fewer of them.  Both of these things reduce AD and can lead to a decrease in Australia's GDP.

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