Question

Under the extended balance portfolio model of exchange rate determination, predict what will be the effect of a nation’s exchange rate if the domestic interest rate was to fall relative to the foreign interest rate.

Answer 1

Ans:

• The interest rate, currency value and exchange rate are corelated to each other. In balance portfolio model , the portfolio is balanced in terms of exchange rate.
• It is the situation where foreign exchange transaction occurring between two countries, the interest rate prevailing in those play critical role affecting the exchange rate through their respective currency value in which financial or forex transaction takes place at exchange platform.
• The concept is when the domestic interest rate decline , the currency of domestic country also depreciates with respect to foreign country as interest in foreign country increases effecting appreciate its currency value.
• By taking two currency value , exchange rate is determined at that particular moment of transaction.
• Domestic country 's nation's exchange rate faces slight loss proportionately in comparision to foreign exchange.