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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