Answer to Question #289889 in Macroeconomics for Comfort

Question

What are the determinants of foreign exchange rate? Show this graphically [15 marks]

Answer 1

Determinants of foreign exchange rate include:

       i. Inflation rates – Country with low inflation rates has a rising currency value

ii.           Interest rates – Changes in interest rates affect the currency value of a country.

Other determinants of foreign exchange rate include:

Terms of trade – This is the ratio of the export prices to import prices

    iv.           Country’s Current account – The state of current account of a country reflects the balance of trade and earnings from foreign investments.

      v.           Government debt – Investors are unlikely to invest in a country with high public or national debt.

    vi.           Recession – Recession in a country lead to decreased interest rates which decrease the ability to acquire foreign capital.

  vii.           Political stability – A country with less political turmoil attract many investors.