Question

Which three factors most directly affect the demand for a country’s currency on the international currency market?

1. Central Bank actions to increase or decrease the money supply

2. the demand for the country's goods and services

3. the exchange rate with other currencies

4. strong economic growth

5. the demand for financial assets from that country

Answer 1

1. central bank actions to increase or decrease money supply. suppose fed decides to increase the money supply. LM curve will shift right due to which interest rate will fall. due to this the demand for the currency will increase as the interest rate has fallen. when the price of a good falls its demand increases, interest rate is the price of money demanded. Opposite is true for decrease in money supply.

2. if the demand for the country's goods and services increase, people will need more money or currency to buy stuff. thus they will demand more of this currency and thus its demand will go up.

3. STRONG ECONOMIC GROWTH will tend people to expand their business. it will lead to growth of various industries in the economy people will increase their capital. they will try to invest and thus all of this requires domestic country currency. for businesses to flourish and economy to prosper people will need currency and its demand will go up. economic growth will lead to people demanding more currency

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