The exchange rate between the Australian dollar and the Indian rupee is determined in a flexible foreign exchange market. (a) Assume India is currently in recession. What fiscal policy action could the Indian government take to eliminate the recession?
(b) What would be the effect of the fiscal policy action identified in part (a) on interest rates in India?
(c) Draw a correctly labeled graph of the foreign exchange market for the Australian dollar. Show on your graph the impact of the change in interest rates identified in part (b) on each of the following.
(i) The supply of Australian dollars
(ii) The equilibrium exchange rate of the Australian dollar (d) What would be the effect of the change in the exchange rate identified in part (c)(ii) on Australian exports?
(e) What would be the effect of the change in Australian exports identified in part (d) on Australian unemployment?

The exchange rate states about the currency value of a nation compared to another nation's currency value.

(a) The nation that is experiencing recessionary situations in its economy must adopt the expansionary fiscal policy. It would reduce the tax rates and increase government spendings so that the aggregate demand could be increased.

(b). The interest rate would be seen as rising when expansionary fiscal policy is executed as it would bring encouragement in citizens to borrow money that would finally increase the aggregate demand.

(c). The graph of the Australian exchange rate is drawn as follows:  

Hence, it shows that increase in the exchange rate would provide the nation with increased exporting facilities.

(d). When the quantity of money rises in the nation then it would bring more employment levels in the economy as the exchange rate rise means there are more exports in the nations.  

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Answer and Explanation:

a. For eliminating the recession government should take an expansionary fiscal policy like tax reduction or rise in government spending etc

b. The impact of the fiscal policy would be result in high borrowing by the government due to which there is rise in the rate of interest

c. The graph is shown in the attachment

d. It shows the depreciation of the dollar due to which the exports are increased and it become cheaper for the foreigners

e. In the case when the production rises so there is a decline in the unemployment that result in high exports

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