Question

Use real or hypothetical examples as a way to illustrate your explanation:

- Determination of Exchange Rates: main factors affecting the exchange rates

Answer 1

Determination of Exchange Rates:

It is assumed that exchange rate ask in the question means to foreing exchange rate.

Foreign exchange rate is the amount of domestic currency that must be paid in order to get a unit of foreign currency.Foreign exchange rate can be fixed or floating.

According to PPP(Purchasing Power Parity) theory,the foreign exchange rate is determined by the realtive purchasing powers of the 2 cuurencies.

For example:If a Pen costs $100 in the USA and Rs 500 in India,then the exchange rate between India and USA will be;

=Rs500/$100

=5

It means 1$=5 Rs or 1Rs=.20$

Factors affecting the exchange rates

Basically,demand and supply of foreign exhange affect the exchange rates.

For example,if the demand for US dollar in relation to Indian rupees increases,the supply -demand relatioship will cause an increase in the price of US dollar in relation to Indian rupees.

There are countless geopolitical and economic annoucements that affect the exchange rates between two countries but most common include:-interest rate changes,inflation reports,unemployment rates,gross domestic product numbers,manufacturing data and commodities.

Stability of country's government also affect the exchange rate.If the government is not stable,the currency in that country is likely to fall in value relative to more stable nations.