Question

During the mid-20th century most of the world's curriencies were in a fixed exchange rate system. By the 1970s the fixed rates for the major curriencies could not be maintained and today many of the major currencies vary, or float, against each other. There are two issues to discuss, 1) what causes currency exchange rates to change, and 2) what is the effect on a country and its commerce when its currency exchange rate changes by, a) a strengthening of its currency, or b) by a weakening of its currency

Answer 1

Ans

1 simply supply and demand factors for a currency that cause change in it E. G higher interest in usa lead foreign investors to demand more dollars to invest in usa in order to earn higher interest rate there. As a result value of dollar appreciates and exchange rate falls

2a strengthening of its currency causes greater demand for imports since imports become cheaper.on the other hand exports become costly for foreigners and thus demand for tgem rises. This reduce domestic production of goods and hence employment.

B weakening of it's currency makes imports costly and exports cheap. As a result net exports rise. This leads to increase in domestic output and employment.