ECONOMIC CURRENCY

Most of the world's currencies are bought and sold based on flexible exchange rates,
meaning their prices fluctuate based on the supply and demand in the foreign exchange market.
A high demand for a currency or a shortage in its supply will cause an increase in price. All
imports, foreign currency loan & interest payments are affected - the country has to pay more
for them. It affects the inflation rate too (Purchasing power parity theory). The Changes in
Nominal Exchange Rate impacts the economy through two main channels: Trade and Finance
Channels. An exchange rate appreciation causes a slower growth of real GDP because of a fall in
net exports (reduced injection) and a rise in the demand for imports (an increased leakage in the
circular flow) Thus a higher exchange rate can have a negative multiplier effect on the economy.
The exchange rate has an effect on the trade surplus (or deficit), which in turn
affects the exchange rate, and so on. In general, however, a weaker domestic
currency stimulates exports and makes imports more expensive. Conversely, a strong
domestic currency hampers exports and makes imports cheaper. In the international capital
market, a change in a currency's value may give rise to a foreign exchange gain or loss. The
appreciation of the domestic currency raises the value of financial instruments denominated in
that currency, while there is an adverse impact on debt instruments. Exchange rates are
constantly fluctuating, but what, exactly, causes a currency's value to rise and fall? Simply
put, currencies fluctuate based on supply and demand. A high demand for a currency or a
shortage in its supply will cause an increase in price. Effect of the exchange rate on business. A
depreciation (devaluation) will make exports cheaper and exporting firms will benefit. However,
firms importing raw materials will face higher costs of imports. An appreciation makes exports
more expensive and reduces the competitiveness of exporting firms. Unemployment rates are
used to measure the percentage of the labor force that does not have a job, but is looking for
employment. A higher level of unemployment has a negative effect on the value of a currency.
An increase in GDP will have a positive effect on the currency. If consumer spending increases to
the point where demand exceeds supply, inflation may ensue, which is not necessarily a bad
outcome. ... Higher interest rates tend to attract foreign investment, which is likely to increase
the demand for a country's currency. Demand-pull inflation can be caused by factors such as the
following: ... Currency devaluation can lead to higher exports (as our goods become suddenly less
expensive and thus more attractive to foreign buyers) and this increases aggregate demand for
our goods and services. Higher demand can lead to high prices.
CURRENCY & FOREIGN EXCHANGE
PROBLEMS
https://www.tandfonline.com/doi/pdf/
10.1080/00358532109411878
OUTPUT IN MACROECONOMICS

PREPARED BY:
JINKY T. MENDOZA BSAT3A
SUMMITTED TO:
MS. MARITONI MEDALLA MBA, HTM
 REACTION PAPER

Foreign exchange plays an important role all over the world. Countries use their foreign
exchange reserves to keep the value of their currencies at fixed rate. That is why some countries
are concerned with its growth towards the exchange of money. Trade relationships with other
countries is important because the exchange rate, the price of currency in terms of another, helps
the nation’s economic health and hence the well -being of all the people residing it. The rise and
fall of foreign exchange depends on the demands of supply, the more the imports the greater
the supply of pounds. A strong currency helps the country’s export more expensive hurting that
nations trade competitiveness, on the other hand weak currency makes more import expensive,
boosting domestic inflation. Changes in the currency exchange rate can affect the
unemployment. Currency appreciation makes import cheaper, and exports become less
competitive, so the domestic demand falls. The rate of inflation in country have a major impact
on the value of the country’s currency. The high inflation leads the cause of currency
depreciation. The rising prices impact the cost of living, the cost of doing business, borrowing
money, mortgages, and every other facet of the economy. Currency appreciation usually reduce
inflation because import become more cheaper and the lower prices lead to lower inflation it
makes the import more attractive, causing the demands for local products to fall. Therefore, the
governments often try to prevent the local currency from appreciating too much or quickly. Thus,
foreign exchange rate is very important in economy.