Question

Please answer the following (short and concise answer)

a.    What are the factors affecting the exchange rates?

b.     Explain the equilibrium of exchange rate market

c.    What are the factors that will change the demand and supply in the exchange rate market?

Answer 1

Part A Factors affecting the exchange rates :

· Interest rate

· Political Stability

· Economic Growth

· BOP Status

· Inflation Rate

· Terms of Trade

· Total Government Debt

· Speculation

Part B equilibrium of exchange rate is the rate at which the supply and demand for a currency are equal, i.e. the price at which 2 currencies maybe exchanged and the value od exchange remains same for both the parties.

Part C factors that will change the demand and supply in the exchange rate market:

· Expected rate of return

· Demand for foreign products, i.e Imports

· Level of Exports