Question

If you were going to Europe, would you want the U.S. dollar to be strong or weak? Interpret the current exchange rate between the U.S. and the Euro (so if an item costs 10 Euros, how much does it cost in U.S. Dollars?)

What are freely floating exchange rates? What are fixed exchange rates?

Explain how supply and demand affect floating exchange rates. What causes a currency to appreciate and depreciate?

What factors influence the exchange rate between countries? Do we have any control over exchange rates?

Answer 1

I would want the US dollar to be strong.

At present 10 euro is 11.40 usd so it would cost 11.4 us dollars.

Freely floating exchange rates are flexible exchange rates where just like prices we have the exchange rate as price of one currency in terms of other.

Fixed exchange rate is monitored by central bank and not altered from specific level.

If the demand for a currency rises then it appreciates or strengthens.

And if supply rises then it weakens.

The taste and preference of other countries decide our exports. If our export is more then the currency appreciates again if our income rises then we import more and currency depreciates. We can control the exchange rate by maintaining fixed exchange rates but once the deviation is too high between actual and fixed exchange rate then we have to give away to flexible exchange rate. We can impose tariffs to reduce imports and thus control exchange rates.