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Chapter 5: Q3 DQ (page 679)

List the factors that affect the value of a currency in foreign exchange markets.

Short Answer

Expert verified

The factors are inflation, interest rates, government policies, the balance of payments, and other factors.

Step by step solution

01

Explanation of Foreign Exchange Rate

Foreign exchange rate refers to the relationship between the currencies of two countries.

02

Factors affecting the value of the currency in foreign exchange markets

The factors are as follows:

  • Inflation: If the inflation rate between two countries changes, it also changes the exchange rates.
  • Interest rates: The difference in the interest rates of two countries affect the exchange rates.
  • Balance of payments: Deficit in the balance of payments declines the currency's value.
  • Government policies: The country's government intervenes in the exchange market to regulate the value of the currency in the exchange market.
  • Other factors: Increasing demand for the currency may affect the currency's exchange rate.

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