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Economics Quarter 4

Why does exchange rate
Chaichon Chaiyasat (Alex)
1006 Submitted to

Mr. Dan Simmons

What is Exchange Rate?
An exchange rate is a
comparison between the value of
two currencies.
What influence exchange rate?
There are many factors which
affect exchange rate, for
example, interest rates, rate of
inflation and politics conditions.
These are the major factors that
affect exchange rates.
Please note that there are
numerous factors, which affect
the exchange rate and the
followings are barely the major
Countrys inflation
What is inflation?
Inflation is the condition of a countrys
economy, which the value of the nations
currency has decreased. An example of
inflation is: In 2001, 10 Baht can buy one
cone of ice cream and in 2010, it requires
15 baht to buy one cone of ice cream. As
you can see it requires more Thai Baht to
purchase a cone of ice cream, which
means the value of Than baht has
decreased, or Thai economy has incurred
Countrys Inflation
Inflation plays a big role in determining a
countrys currency value and the
exchange rate between two countries. As
has been said earlier, inflation causes
the currency's value to decrease. That
means countries with low inflation have
their currencys value preserved in good
condition. More currencys values means
that the country has more power to buy
things, in another word it has high
Countrys Inflation
To summarize, the lower rate of
inflation the higher the currency
In contrast, the higher rate of
inflation the lower the currency
Interest Rates
InterestRates play a vital role in
determining a countrys
currencys value besides inflation
Interest Rates
What is Interest Rates?
Interest Rates is the percentage
of the money returned after an
individuals have gotten loans
from a banks or other
Interest Rate
Countries with high interest rate
attract foreign investments,
because the investors will get
good profit there and will raise
high demand for the countrys
In Contrast, countries with low
interest rate have low currencys
value because they their
currencys demand are low.
Current Accounts Deficits
Current Account is the trading
balance between two countries.
The trading balance between two
countries has impact on the
currencys value of the countries.
The process will be explained
step by step
Interest Rates
Certainly, countries with high interest
rates, which is regulated by the Central
banks, will offer lenders a high return.
Consequently, foreign capital will be
interested to come in, which in other
meaning, the demand for the country's
currency will rise up and the value of
the countrys will do as well. In
contrast, if the Central Bank does not
foster high interest rate then the
situation will go the opposite way.
Current Account Deficits
Suppose that the diagram below
is the current account of Thailand
and Singapore.
Current Accounts Deficits
Singapores import Thailand costs it -3,million
dollars, where its exports gives Singapore 2.5million
dollars. That means, Singapore has owned Thailand
500 thousand dollars and the owned money is called
the Current-Account Deficits
Current Account Deficits

The diagram above suggests that the demand for Thai Baht is
high, because Singapore has more imports than, which
according to the law of economics high demand makes the
Baht become more valuable compared to Singapores
currency. If this keeps going on for a long period of time, then
Thailand might stop purchasing imports from the US and the
exchange rate will become normal again.
Public Debt
Countries that incur big deficit-financing
usually are not liked by foreign investors,
because such countries tend to have high
How? When a country borrowed money
from another country, they will wedge the
money into the economy and cause the
supply of money to go up. The uprising of
money supply will trigger economic
expansion and economic expansion cause
inflation. Inflation, as has been said, shift
the currency value of the country.
Public Debt
Another way which this might have
impact on exchange rate is: In order to
solve the deficit problem, the
government might increase the money
supply in the nations economy with,
unavoidably, causing inflation and the
currencys value will be shifted.
In addition, the country may cheapen
its currencys value to make good deals
in foreign-trade affairs in order to get
rid of the debt.
Political Stability and Economic
Foreign investors do not like
countries with unstable politics
and economic performance. It is
investors predicting where should
they invest their capital in? And,
of course, they will want to invest
in the countries which are SAFE
from all the scenarios described
prior to this.
Ifthe speculators predict that the
currencys value will rise in the
near future, they will likely to
demand for the countrys
currency and higher demand will
make higher currencys value.
And in contrast, if the demand is
low, then the currencys value
will become normal.
Ifa countrys goods or services
has become likable by other
countries. It is likely that they will
compete for the goods and
services, in other words, the
demand for the goods and
services will rise.
Economic Expansion and
Economic Recession
One of the most basic knowledge
in economics is Economic
expansion and Economic
Absolutely, these two economic
scenarios have impact on a
countrys currency value.
This process will include the 2
major factors which have impact
on currency value: Inflation,
Economic Expansion &
When a country incurs economic
recession, foreign investors will
be lured away, which means the
demand for the countrys
currency will be low. This makes
the countrys currency become
Economic Expansion and
Incontrast, in economic
expansion, foreign capitals like to
come in and invest in it, which
makes the demand for the
countrys currency become high.
And this make the countrys
currency become more valuable.