Answer to Question #242109 in Macroeconomics for Awe

Question

For the theories under the determination of exchange rates;

Give a background of the theory i.e. who originated the theory, what are the conjectures of the theory etc. 

 

Highlight how the theory best explains the determination of exchange rates. 

Do you think a floating exchange rate is a better option for protecting the value of a domestic currency versus a fixed exchange rate?

Discuss the relevance of the given theory in a South African and global perspective using empirical evidence.

Answer 1

Balance of payment theory

The theory was originated by Krueger. Its conjectures are deficit in balance and balance of payment. The theory states that the supply and demand for foreign goods affects exchange rate through the currency value. Floating exchange rates allows the monetary and fiscal authorities to pursue internal goals such as full employment, stable growth, and price stability whereby the exchange rate adjustment works as an automatic stabilizer to promote those goals The significance of theory is that it uses supply and demand to determine the exchange rate, it also involves forces which affect demand and supply of foreign currency.