B) Does our level of international debt matter? Discuss
Our level of international debt matters because when NZ borrows money from overseas it needs to be able to pay the interest costs and service the loans. When NZ repays international debt it needs to be in the currency where the debt is, which can be expensive depending on the exchange rate. When we have international debt there needs to be enough income to cover the cost of this debt.
C) Should we aim for a high or low dollar?
We should aim for neither a high or low dollar but somewhere in the middle, many experts say the perfect amount would be approximately 55 cents. This is because although we want to have an export led economy we also import a lot of products that help us to produce the exports in the first place, an example of this is that we import fertiliser for the farmers to grow their vegetables to then export the vegetables overseas. If the dollar is too low this would make it very expensive for us to import this goods but if the dollar is too high it has an impact on our exports and many may choose to buy imports instead which could contract our economy.
D) Explain the relationship between an exchange rate appreciation/depreciation and current account
If there is depreciation in the exchange rate then it costs less for people overseas to purchase our exports however it will increase in the cost of NZ business buying imports. This may lead to an increase in price for the consumer for imports and a fall in demand. As imports grow more expensive people will supplement the products for more cost effective New Zealand products by spending more of their money in NZ and this helps to reduce the current account deficit.
E) Explain the relationship between an exchange rate appreciation/depreciation and employment/unemployment.
The relationship between our exchange rate and employment/unemployment is that If we have high unemployment in NZ the RBNZ will be likely to delay increasing interest and will therefore make our currency rate less attractive and cause a depreciation in the exchange rate. This is because if employment is high then Interest rates in NZ may be higher than other countries, and therefore it will make overseas investors more likely to want to save money in NZ, this will cause an injection of