Case 2.4 The great economic spectacle:
Ups and downs of the US$/AUS$
exchange rate
Summary
This case study shows how the demand/supply model can be applied to interpret changes
that occur in the exchange rate for the Australian dollar.
Suggested answers
1 Suppose that there is an increase in demand by US tourists to visit Australia. How
would you predict that this will affect the US$/AUS$ exchange rate?
An increase in demand by US tourists to visit Australia should increase demand for
AUS$. This is because the US tourists will need to buy AUS$ to spend when they are in
Australia. An increase in demand for the AUS$ will cause an increase in the US$/AUS$
exchange rate; that is, since $1AUS will now buy a larger amount of US currency, it is
said that the value of the Australian dollar appreciates.
$US
per
