Exchange Rate

Question 1

What are the factors causing exchange rate depreciation or appreciation

Answer 1

1) Interest Rate
2) Speculation
3) Inflation
4) Political stability, Terrorism
5) Economic Prospects
6) Economic Condition of trading partners

Question 2

What are the effects of depreciation of exchange rate?

Answer 2

1) In short run AD decreases and in LR AD increases
2) As AD increases Demand Pull inflation occurs
3) IN SR SOL and unemployment rises however in the LR both increase
4) Domestic Producers may improve efficiency
5) More Imports can be bought higher SOL
6) Terms of Trade will improve

Question 3

Effects of Exchange Rate Appreication?

Answer 3

1) IN SR AD would be higher in comparison to LR
2) Less Inflation
3) Lower SOL IN LR as comparison to SR
4) Higher unemployment in LR as comparison to SR
5) Since imports cheaper domestic producer will suffer
6) Since exports more expensive exporter will suffer

Question 4

Factors affecting demand for local currency

Answer 4

∑ Change in value of domestic currency in terms of foreign currency (movement
along the line)
∑ Increase in demand of goods in foreign market (exports)
∑ Increase in foreign incomes
∑ Increase in interest rates
∑ Better investment prospects
∑ Speculation

Question 5

Factors affecting supply of local currency.

Answer 5

∑ Change in value of domestic currency in terms of foreign currency (movement
along the line)
∑ Demand of imported goods in the country
∑ Increase in interest rate in foreign countries
∑ Better investment prospects in foreign countries
∑ Speculation

Question 6

Factors affecting demand of local currency?

Answer 6

∑Change in value of domestic currency in terms of foreign currency (movement
along the line)
∑ Increase in demand of goods in foreign market (exports)
∑ Increase in foreign incomes
∑ Increase in interest rates
∑ Better investment prospects
∑ Speculation

Question 7

Factors affecting supply of local currency?

Answer 7

∑Change in value of domestic currency in terms of foreign currency (movement
along the line)
∑ Demand of imported goods in the country
∑ Increase in interest rate in foreign countries
∑ Better investment prospects in foreign countries
∑ Speculation