With reference to the relevant four-quadrant diagram, and assuming no change in long-run exchange rate expectations,...

With reference to the relevant four-quadrant diagram, and assuming no change in long-run exchange rate expectations, use Harvey's exchange rate model to discuss the potential impact on interest rates, exchange rates and employment of a fiscal stimulus.

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Expert Solution

An exchange rate is the value of the currency of a nation, with the currency of another nation or a different economic zone. That is an exchange rate has two components - a domestic currency and a foreign currency.

Exchange rates are of two types :

i. Free -floating

Dedending upon the changes in the foreign exchange market, the free floating exchange rates also shows rise and fall tendency.

ii. Restricted currency

The value of a restricted currency is set by the governement. Some countries have restricted currencies, and the exchange of the same is limited to their own boarders.

The most important facor that influence the exchange rates are relative difference in interest rates in each country.

Interest rates can be predicted with the help of economic models, news and surprise announcements can have immediate effects on the rates that in turn affect forex prices.

As far as day traders are concerned, interest rates are crucial to them. If the rate of return is higher, they acquire more interest on the currency they have invested, and the profit also will be higher.

The risk expected in this strategy is currency fluctuation.

In addition to the factors like interest rate and inflation, the currency exchange rates also determines a countries economic growth. Exchange rates played avital role in international trade, which is critical for the existence of every free market economy anywhere in the world.

Rahul Sunny answered 1 year ago

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