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The article states Australian dollar was near a two-month high againstthe US currency The money-demand and money-supply model belowexplains how the export boom would have led to the appreciation of theAustralian dollar AUD Fig 11 Money-demand and money-supply modelIt should be highlighted that the increase in terms of trade ofAustralia means that exports increase which means that the income ofother countries such as the United States was higher than the income ofAustralia other countries would be importing more goods and servicesfrom Australia where it would be cheaper The increase in demand for Australian exports increased the demand forAustralian dollars AUD and decreases the supply of AUD The moneydemand curve moves from MD0 to MD1 this increases the quanity of AUDdemanded per day from 4 to 5 trillion Increasing the exchange rate from101 to 110 The money market equlibrium moves from point A to point BHowever as the supply of AUD decreases the money supply curve movesfrom MS0 to MS1 This brings the quantity traded back to 4 trillion AUDper day and increases the exchange rate even higher to 113 The newmoney demand-money supply equlibrium is at point C As the exchange rate of the Australian dollar increases so does theprices of goods and services in Australia Increasing the purchasingpower of Australians The increased purchasing power of the Australianeconomy would mean that there would be an increase in inducedexpenditure imports and consumption This is how increase in exportswould lead to an inflation - higher purchasing power leads to higherconsumption and thus inflation Using the aggregate expenditure equationAE C I G X - M we can explain in more detail how this reboundeffect would come about Net exports and investments are part of theautonomous expenditure of the economy That is these events will occureven though there is little or no income in the economy it does notrely on the real GDP of Australia We will use the aggregateexpenditure
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