Suppose as a result of the COVID-19 outbreaks and the subsequent extensive lockdown measures, the Australian economy goes into a deep recession. Assume also that China has somehow avoided the...

Suppose as a result of the COVID-19 outbreaks and the subsequent extensive lockdown measures, the Australian economy goes into a deep recession. Assume also that China has somehow avoided the recession as it could successfully contain the virus in the early stage of the spread. Use the exchange rate market model and relevant diagrams to answer the following questions.

1. 
   

   (a) All else equal, how is this economic weakness in Australia likely to affect the value of the dollar against the Chinese yuan?

   
   


2. 
   

   (b) How might your answer to 3(a) be different if the RBA reacts to the recession by an interest rate cut? Assume that China hasn’t changed its monetary policy.