Question

EXPLAIN THE RISE IN THE EXCHANGE RATE AND EXPLAIN WHAT MIGHT BRINGS THIS ABOUT?

Answer 1

The raise in the exchange rate means that there is an appreciation of the exchange rate. It means that the country's currency has gained more value more when compared to other countries' currencies. For example, say USA's dollar was previously $1 = 67 Indian Rupee, but now it is $1 = 69 Indian Rupee. So, now, since you can buy more Indian Rupee with one US dollar, the value of US dollar has increased and this is what the rise in the exchange rate means.

The factors that influences the raise in the exchange rate are:

(1) Terms of Trade - When a country's exports raises more than its' imports, the country's terms of trade improves and this leads to a higher demand for that country's currency compared to other currencies and with higher demand there is appreciation of the exchange rate.

(2) Inflation difference - If the home country's inflation rate is lower compared to foreign countries, then the home country's goods would become cheaper compared to foreign countries and home country's exports would raise. This would lead to appreciation of the home country's exchange rate.

(3) Interest rate difference - If the home country's interest rate is higher compared to other countries then foreign investors would bring in more money to the home country in order to invest their money at a higher interest rate. This would lead to increase in demand for home country's currency and there would be raise in the exchange rate.

(4) Good Economic Growth - A country which has a high economic growth would give a boast to foreign investors to be bullish with that country and they would want to invest there capital and receive large returns on their investment. This would also lead to appreciation of the exchange rate.