Question

What are the implications of a change in the real exchange rate of a currency?

Answer 1

The implications of a change in the real exchange rate of a currency is :

1) The import and exports get affected. Increase in the local currency make favourable export balance.

2) The inflation in the economy have a direction. Increase in the local currency will reduce the inflation or vise-versa.

3) Affects the allied activities in the economy like tourism ie. increase in the local currency exchange rate will brought tourists in the economy.

4) Affects the foreign exchange loans. To say, higher local currrency rates makes foreign exchange loans cheaper and vise-versa.

5) Current account deficits reduces if the local currency rates improves or vice-versa.

6) Interest rates reduces if the local currency rates imporves or vice-versa.

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