## Answered: - Assume that Australia trades mostly with two countries only, the

Assume that Australia trades mostly with two countries only, the United States and theUnited Kingdom, such that 70 per cent of the trade is conducted with the United States, 25per cent with the United Kingdom, and 5 per cent with the rest of the world. The exchangerates of the Australian dollar at two points in time, 0 and 1, are as follows: 0 1AUD/USD 1.3541 1.7724AUD/GBP 2.1533 2.5692(a) Calculate the exchange rates in indirect quotation from an Australian perspective.(b) Calculate the percentage rates of depreciation or appreciation of the Australiandollar against the two currencies. Comment on your results.(c) Calculate the exchange rate relatives, using 0 as a base period.(d) Calculate an unweighted effective exchange rate index, using 0 as a base period inwhich the index assumes the value of 100.(e) Calculate the normalised trade weights.(f) Calculate the trade-weighted effective exchange rate index. What is the rate ofappreciation or depreciation of the Australian dollar in effective terms? Compare thisresult with that obtained in (b) and (d) above. Comment on your results.(g) Recalculate the effective exchange rate as a weighted geometric average. Comparethe results with the previous ones.

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