The foreign currency exchange market is a dynamic environment whereby the mechanism that determines currency exchange rates is well understood, if not easy to control.
(A). What economic factors affect foreign currency exchange rates?
(B). What noneconomic factors affect foreign currency exchange rates?
(C). How can the currency exchange mechanism be influenced to produce stable foreign currency exchange rates?
The foreign currency exchange market is a dynamic environment whereby the mechanism that determines currency exchange rates is well understood, if not easy to control.
(A). What economic factors affect foreign currency exchange rates?
(B). What noneconomic factors affect foreign currency exchange rates?
(C). How can the currency exchange mechanism be influenced to produce stable foreign currency exchange rates?
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Related questions
If rising inflation in an economy with fixed exchange rates puts downward pressure on the value of the currency, what action must the government take to maintain fixed exchange rates?
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If Costa Rica can produce 50,000 pounds of bananas a day, while Nicaragua can produce 30,000 pounds of bananas a day, which statement must be true?
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Just as with the price of a good, the price, or exchange rate, of a currency is determined by supply and demand. However, rather than using a traditional supply and demand analysis as shown in Marthinsen, currency traders often consider whether foreign funds will flow into or out of a country as a result of a particular economic circumstance. If foreigners wish to make domestic purchases or investments, foreign currency must first be exchanged for the domestic currency. Thus, foreign funds flowing into a country increase the demand for the domestic currency and it appreciates. Funds flowing out reverse this process leading to depreciation of the domestic currency. In the table, place an X to indicate whether each economic condition will cause foreign funds to flow in or out of the country and whether the domestic currency will appreciate or depreciate.
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Domestic circumstance |
Funds flow in |
Funds flow out |
Currency appreciates |
Currency depreciates |
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Real interest rates are higher than in other countries |
Ā | Ā | Ā | Ā |
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Risk of civil war |
Ā | Ā | Ā | Ā |
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Business taxes are raised above world average |
Ā | Ā | Ā | Ā |
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Expected stock market returns are better than elsewhere |
Ā | Ā | Ā | Ā |
|
Inflation increases |
Ā | Ā | Ā | Ā |
|
A large deposit of rare earth minerals is discovered |
Ā | Ā | Ā | Ā |
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Rapidly growing manufacturing sector imports more foreign raw materials |
Ā | Ā | Ā | Ā |
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World commodity prices (such as oil or grain) fall in a country that is a major commodity exporter |
Ā | Ā | Ā | Ā |
|
GDP increases |
Ā | Ā | Ā | Ā |
|
PI falls |
Ā | Ā | Ā | Ā |
