Exchange rates: value of one currency expressed in terms of another currency.

Types of exchange rates

1. Floating Exchnage rates: Value is deytermined by demand and spply

Chnages to exchnage rate:

Appreciation: rise of one currency in terms of another. Rise in Demand or fall in supply.

Depriciation: Fall of one currency in terms of another. Fall in Demand or rise in supply.

Causes of Changs:

• Foreign demand for exports>affects demand of currency
• Domestic demand for imports> affects supply> as domestic currency needs to be exchanged.
• Relative interest rate changes: Higher interest rates> attract foreign capital from other> raising demand for domestic and raising supply for foreign
• Relative rates of inflation: High inflation> reduces export competitiveness> fall in demand for currency.
• Investment from abroad:
• Changes in incomes: high incomes> more demand for imports> increases supply
• Speculation
• Foreign currency reserves: central bank> use foreign currency to buy currency or use its currency to buy foreign currency influencing demand supply.

Effects

High Exchange Rate: