Answer to Question #256954 in Macroeconomics for Cross

Question

Identify and discuss five (5) theories of the determinants of exchange rates

Answer 1

The Mint Parity Theory, the Purchasing Power Parity Theory, and the Balance of Payments Theory are three theories of exchange rate determination. According to the balance of payments theory of exchange rate, the rate of exchange of one country's currency with another is influenced by variables independent of domestic price level and money supply. The purchasing power parity hypothesis stipulates the calculation of the rate of exchange between two inconvertible paper currencies.