Question

Carry trade can be divided into two stages the buying part is when investors purchase lower interest rates currency and leverage them to purchase higher value currency. The second stage of trading happens on a level of products and service where the investors will leverage local organizations to produce the products and services at a lower cost. Generally, when interest rates of a certain currency decrease does it usually affects the economy of the country as well.

Answer 1

Currency value is an important factor which can affect the lives of people in an economy because it can determine the stock market and the commodities markets.The purchasing power of goods and commodities strongly depends on the value of currency. There are many factors which contributes to the value of currency and they are interest rates, inflation rate, growth of economy and current account balance.

Out of these factors, the most important one is the interest rate and it measures the cost required to borrow money. Central bank of a country varies these interest rates inorder to balance the economy.

Lowering the interest rates decrease the cost required to borrow money. Thus borrowing increases within the economy. Usually the lower interest rates lowers the currency's demand. Thus people borrow more money inorder to make greater purchases. Thus more money will be with the people and which increases the spending. This will result in inflation in the economy. Thus lowering interest rate is morally bad for the economy.

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