Question

understandings of the effects certain factors have on exchange rates such as:

• If a currency increases/decrease what happens?
• If income or any such factors increase/decrease what happens?
• If supply and or demand increases/decrease what happens?

Answer 1

1. When the currency will be increasing, it will be meaning that exchange rates of domestic currency will be getting stronger because when the currency appreciation of the domestic currency will be there the overall exchange rate in relation to domestic currency will be getting stronger, and if the domestic currency is depreciating the overall exchange rate in relation to the domestic currency will be decreasing

2. When the income and other factors will be increasing then it will always have a positive impact on the exchange rate because when there will be increase of the income it will mean that there will be increase of the disposable income as well and it will be leading to increase in demand and higher demand will also mean that there will be positive impact on the exchange rate so domestic currency will be getting stronger against other currencies and exchange rate will be favouring the domestic currency.

when the level of income will be depreciating then it will mean that there will be lower demand and it will impact exchange rates and domestic currency negatively.

3. When there will be increase in supply to the foreign country, it will mean that there is a depreciation in the domestic currency because foreign people will only buy from domestic country when they will find the domestic country goods cheaper and hence it will be meaning that domestic currency will be weaker and it will be impacting domestic currency and exchange rate negatively and leading to increase in overall exports.

When demand for foreign goods will be increasing and leading to increase in imports, it will mean that the domestic currency has strengthened and domestic currency is appreciating against other currencies so that other currencies are looking cheaper and domestic citizens are buying from outside in form of import so it will be having positive impact on domestic currency and exchange rate.